Matthew Kerkhoff, options expert and editor of Dow Theory Letters, continues his 14-part educational...
Is Tech’s Rally for Real?
07/25/2011 10:50 am EST
Technical indicators suggest that recent tech sector strength can continue, and buyers can now look for favorable entry points in a popular sector ETF and several strong tech stocks.
With two weeks of corporate earnings reports already behind us, the earnings for the technology stocks have gotten most of the attention, as there have been some very pleasant surprises, which contradict a June 24 USA Today article that suggested investors should lower their expectations for tech sector earnings.
The tech-heavy Nasdaq 100 made new highs for the year last week, as it completed its 200+ point trading range, which has been in effect all year. This gives upside targets in the 2600 area, or about 7% above Friday’s close. Those technology industry groups with the best charts include application software, data storage devices, and diversified computer services.
Still, given the market’s growing concern over the US debt ceiling, and even though there is a large amount of money on the sidelines, many are wary of venturing back into the technology sector. However, the technical outlook, including the relative performance, or RS analysis, indicates that recent tech sector strength can continue.
Chart Analysis: The daily chart of the Select Sector SPDR - Technology (XLK) shows Friday’s close slightly above the chart resistance at line a.
- The completion of the trading range has upside targets at $29.50-$30
- RS analysis moved through short-term resistance at line c last week and then turned higher after a retest. The long-term downtrend, line b, has also just been overcome
- Daily on-balance volume (OBV) broke through resistance (line d) in early July and held support last week. The weekly OBV has not yet confirmed the highs
- XLK held the 50% support at $25.54 two weeks ago. That now becomes the key level to watch
Compuware Corp. (CPWR) is a $2.2 billion company that provides software along with Web performance and application services. The daily chart shows that CPWR retested the June lows in the $9.15-$9.40 area, line f, last week.
- Volume was heavy on Friday’s strong close. The daily OBV has moved above its weighted moving average (WMA) and is now testing its downtrend. The weekly OBV has turned higher but is still negative
- There is first resistance (38.2%) at $10.15 with the stronger 50% retracement resistance at $10.67
- The daily downtrend, line e, is in the $11.00 area. The early-2011 highs were at $12.25
NEXT: More Strong Tech Stocks to Buy on Pullbacks|pagebreak|
NCR Corp. (NCR) is a $3.3 billion information technology company whose beginnings date all the way back to 1884. The company reported strong earnings last week that were up almost 13% over the prior year. In reaction to the numbers, NCR opened higher on Friday and closed on the day’s highs.
- The trading range on the daily chart (lines a and b) was convincingly overcome Friday amid heavy volume
- The 127.2% retracement resistance target is at $21.40 with the upside targets from the chart formation in the $22.50-$22.80 area
- Daily OBV has turned up sharply and looks strong, but the weekly OBV (not shown) is still negative
- Initial support is at $20.40-$20.65 with the breakout level at $19.70-$20
- The weekly chart has trend line support (line e) at $30 with the March lows at $29.60
- Daily OBV is acting stronger that prices, as it has held above its weighted moving average despite last week’s drop. The weekly volume (not shown) has turned up but is still just below its WMA
- Initial resistance is now at $33.20-$33.50 with further resistance at $34.05, line c. A move above this level will signal a rally to the stronger resistance at $35.50-$36
What It Means: The overall analysis of the technology sector suggests that the recent strength will continue. The primary negative is that the Advance/Decline (A/D) line on the Nasdaq 100 has not yet confirmed the new highs. It could easily confirm this week, but this is still an important item to watch.
Those not currently long the Select Sector SPDR - Technology (XLK), as recommended last week, or those with a low technology exposure in their portfolios, could consider buying Compuware Corp. (CPWR) and NCR Corp. (NCR), which look like interesting buys on a pullback.
How to Profit: I previously recommended buying XLK at $26.34, and that order was filled last Thursday (July 21) with the low of $26.20. Keep the stop on that position at $25.44. On a move above $27.10, raise the stop to $25.77.
For Compuware Corp. (CPWR), go long at $9.73 with a stop at $9.13 (risk of approx. 6.1%).
For NCR Corp. (NCR), go long at $19.88 with a stop at $18.44 (risk of approx. 7.2%).
Other previous tech stock recommendations include:
Oracle Corp (ORCL): Buyers should be long at $32.04 and using a stop at $30.76. On a move above $34.15, raise the stop to $31.44 and sell half the position at $35.66.
NetApp Inc. (NTAP): Buyers should be long at $50.22 and using a stop at $48.76. On a move above $55.76, raise the stop to $49.74 and sell half the position at $58.84.
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