The Major Trend Favors Tech, But...

09/06/2012 11:00 am EST


Thomas Aspray

, Professional Trader & Analyst

A broad-based look at the technology sector indicates that the positive signals from 2009 are still intact, but MoneyShow’s Tom Aspray cautions that one tech group could drop back to the summer’s lows.

Many of those who have been bullish on stocks during the summer have favored the technology sector, while some skeptics have argued that the strength of Apple (AAPL) is leading to false sense of optimism.

The upcoming Apple event on September 12 has kept the focus on tech, but (AMZN) is trying to beat them to the punch. Their teaser ad last night during the NFL game may have previewed their new Kindle (or Kindles), which are scheduled to be unveiled later today.

Since the June lows, the Select Sector SPDR Technology ETF (XLK) is up 12.6%, beating the 10.6% gain in the Spyder Trust (SPY). Even though Apple (AAPL) makes up 19% of XLK, for many a tech ETF is the best way to invest in the technology sector.

Keeping an eye on the monthly, weekly, and daily relative performance analysis of the technology sector can be helpful in timing purchases and sales in the tech sector. It is also helpful in finding the strongest and weakest technology industry groups. The technical deterioration in one tech industry group requires a more defensive position.

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Chart Analysis: The monthly chart of the S&P 500 Information Technology Sector shows the impressive breakout above long-term resistance (line a) at the end of 2011. For the year, the sector is up over 19%.

  • The Index had a high in 2000 of 988. The major 38.2% Fibonacci retracement resistance has been overcome, with the 50% resistance now at 581. This is 19% above current levels.

  • The monthly RS analysis completed a major bottom in 2009, when it overcame the resistance at line b.

  • The RS line is in a strong uptrend (line c), and shows a clear pattern of higher highs.

  • The weekly RS analysis (not shown) is above its WMA, and has not yet confirmed the April highs.

  • The monthly on-balance volume (OBV) shows a strong uptrend from the 2006 lows (line e), and is well above its rising WMA.

  • There is initial support for the tech index at 455 to 460, with more important at 433.

The Select Sector SPDR Technology ETF (XLK) dropped back to its 20-day EMA last week, and is still well below the August high of $30.96.

  • A daily close below $30 will increase the chances of a pullback to the support at $29 to $29.50. This corresponds to the chart support, as well as the 38.2 and 50% retracement support levels.

  • The uptrend from the June lows (line f) is now at $28.70.

  • The daily relative performance broke through resistance (line g), but is stalled just below the April highs.

  • The daily OBV broke through its downtrend (line h) in mid-June, and shows a pattern of higher highs.

  • The weekly OBV (not shown) did make new highs in August, and confirmed the price action.

  • The 127.2% Fibonacci retracement target is at $31.60.

NEXT: Which Tech Sub-Sector May Be Past Its Prime?


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The rally in the Market Vectors Semiconductor ETF (SMH) appears to have stalled for now at the 61.8% retracement resistance level. The 78.6% resistance stands at $34.99.

  • SMH has further resistance at $35 to $35.35 and then at the March high of $35.96.

  • There were signs at the July lows that a double bottom (line b) was forming.

  • SMH has now dropped back below the breakout level (line a), which is a short-term negative.

  • The 50% Fibonacci retracement support as well as good chart support is at $31.70 to $31.75. Further support sits in the $30.50 area.

  • The daily RS line failed to move above the long-term downtrend (line c), and dropped below its WMA in mid-August.

  • The daily OBV is also in a clear downtrend, and is close to making new lows. It is acting weaker than prices.

What it Means: The longer-term analysis continues to indicate that corrections in the broader tech sector, like XLK, should be a buying opportunity. Last week, I gave my next upside targets for Apple (AAPL) and (AMZN), and they still look viable.

As is always the case, there are some industry groups in a sector that are acting stronger and those that are acting weaker. In early August, there were signs that the semiconductor stocks were looking more vulnerable.

Therefore, I recommended taking some profits and tightening stops. Seasonally, this industry group bottoms in the fall, so I will be looking for signs of a bottom in the next two to six weeks.

How to Profit: No new recommendations for now.

Portfolio Update: Investors should be 50% long the Select Sector SPDR Technology (XLK) at $28.12, and added another 50% long position at $28.18. Use a stop at $27.77. Sell 25% at $31.54 or better.

Investors were 50% long Market Vectors Semiconductor ETF (SMH) at $30.88 and 50% long at $30.46. Having sold half at $33.42, they should use a stop at $31.31 on the remaining position.

For Intel (INTC) investors were long at $25.71, sold 50% at $25.68, and stopped out of the other 50% at $24.73.

For Microchip Tech (MCHP), investors were 50% long at $32.08 and 50% at $31.44. They should have sold half at $34.92, and use a stop at $33.08 on the remaining position.

For NVIDIA (NVDA), investors were 50% long at $12.64 and 50% long at $12.36. They should have sold half at $14.26, and use a stop at $12.92 on the remaining position.

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