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Seven Tech Picks for 2011
01/13/2011 2:35 pm EST
Stocks have started out 2011 in an impressive fashion, and historically, it should be a good year for stocks. Technically, the intermediate-term trend for the stock market as we begin 2011 is also positive, even though the market is overdue for a short-term correction. I think technology stocks should play an important role in your portfolio for the coming year. I have seven tech stocks that I’m recommending either near current levels or on a pullback. Let’s first look at where I think the S&P Technology Sector is headed in 2011.
The weekly chart of the S&P Technology Sector shows that in October, the trend line resistance (line A) was overcome, and just two weeks later, the April 2010 highs were also exceeded. This confirmed the resumption of the uptrend. The index is now about 8% above the April highs.
So what’s next? The weekly pattern of higher highs and higher lows is still clearly intact, as there has been little in the way of a pullback over the past six weeks. Using the correction from the April highs to the July lows, the 127.2% retracement resistance level at 289 has been exceeded with the 161.8% target at 307.51. This is very close to the 61.8% projection target using the rally from the March 2009 lows to the April 2010 highs. The parallel trend channel has its upper boundaries now in the 320 area. For the super bulls, the equality target is above 350. There are no clear signs yet of a top despite the too-high bullish sentiment, but nevertheless, a 4%-7% correction does seem likely in the first quarter. I would expect the support in the 278-285 level to hold.
In Monday’s Charts in Play feature, I discussed the premise for today’s lesson and featured one of my picks, which is Micron Technology (MU). The weekly chart was featured, and I noted that MU had gapped higher last week and broken its short-term downtrend. This combined with the fact that the on-balance volume (OBV) had completed a major base formation last fall made me recommend buying Micron Technology at $8.36-$8.43 with a stop at $7.33. Talk about getting lucky!
My comment was posted about ten minutes after the opening on Monday, January 10, and MU dropped into the buying zone just after 11:00 am, trading to a low of $8.39 before turning higher in the afternoon. It closed at $8.55, but by mid-Tuesday it had broken the downtrend on the 30-minute chart (line A).
It was important that the on-balance-volume (OBV) had already moved through its corresponding resistance, line C. The best OBV signals occur when it is leading prices either higher or lower. We saw very strong action on Wednesday and heavy volume with MU trading above $9.20. MU has next chart and retracement resistance between $10.30 and $11.60 with the 2006 high at $18.65.
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Another technology stock that looks attractive is SunPower Corp. (SPWRA). On the daily chart, SPWRA appears to be forming a reverse head-and-shoulders bottom formation. Of course, SPWRA needs a strong close above the neckline currently at $15.20-$15.34 to confirm the formation. Once the neckline is overcome, the upside targets are in the $20-$21 area. Let’s examine the evidence.
The highest volume occurred on the decline into the May lows with volume close to nine million shares on May 27. This is an important part of this formation, as the volume should be heaviest when the left shoulder (LS) is being formed. The volume should then be lower as the head and right shoulder (RS) are being formed, as it is an indication that there are fewer sellers of the stock. This action in SPWRA is consistent with this pattern.
Though it is rarely a good idea to anticipate the completion of any chart formation, I am recommending SWPRA with the full knowledge that I may be jumping the gun, and also that it may take more than one attempt to get long this stock. On Tuesday, January 11, I recommended buying SPWRA at $14.08-$14.22 with a stop at $12.47. The low over the past two days has been $13.82. Clearly, the action over the next week will be important, and I would advise raising the stop to $12.97 if SPWRA moves above $14.84.
There are a couple of big names on my list, and they are two of the unloved tech stocks of 2010. The first is Cisco Systems (CSCO), which was hammered in early November as it dropped from above $24 (point A) to just above $19 on heavy volume following a disappointing earnings outlook.
As discussed in early December, CSCO reached its lower starc band, but did stay above the major 61.8% support of the rally from the March 2009 lows to the May 2010 highs. The rally in May 2010 took CSCO above the major 61.8% resistance level (in pink), which I believe is a positive sign for the longer term. In the past six weeks, CSCO has rallied back above the $21 level, and the next key resistance is in the $21.50-$22.50 area. The weekly OBV has turned up, but for now, there are not yet any conclusive signs that a significant new weekly uptrend has begun. There are signs of accumulation that suggest a reasonable pullback will be well supported. I would look to buy CSCO on a pullback to the $20.36-$20.66 level with a stop at $18.81.
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This next stock, Rubicon Technology Inc (RBCN), recently appeared on one Web site’s list of the worst semiconductor stocks of 2010 as it was up only 3.4% for the year. To me, this is a plus, especially when the technical action is positive. This week, RBCN looks poised to close above its short-term weekly downtrend, line A. Next resistance stands at $24.60. Further resistance is at $26.60 and a close above this level is likely to get the market’s attention. The 50% retracement resistance from the July highs is at $27.22 with the 61.8% level at $29.36. There is first support now at $21.10-$21.40 and then at $19.60. The weekly uptrend is currently at $19.47.
Volume action is positive as the OBV has already broken out to the upside and moved through its downtrend, line C. I would buy RBCN at $22.56-$22.82 with a stop $19.49.
Of course, one of the challenges in finding technology stocks is finding those that have not already shot up over the past four months. One stock that has recently started to move higher, but in my opinion, still has significant upside potential remaining, is STEC, Inc. (STEC), which closed above the downtrend last week (line A). The rally has continued, and the 38.2% resistance at $22.08 is now being challenged. The 50% resistance level is at $26.02 with more significant resistance in the $30 area.
The OBV has also moved through its resistance, line B, supporting the positive price action. There is initial support for STEC now in the $20-$20.60 area with more important support in the $18.80-$19.40 zone. I recommend buying STEC on a pullback to the $18.95-$19.50 area, using an initial stop at $17.26. I refer to this stop as “initial” because if STEC were to drop sharply into our buying zone on higher-than-normal volume, then I might decide a tighter stop is warranted. If so, I will let readers know.
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One well-known technology company that was in the news last summer for all the wrong reasons was Hewlett Packard (HPQ), which also has an interesting chart. Some who are bearish on HPQ suggest that the peak in April 2010 at $54.75 represented the completion of a major double-top formation. One of the reasons why I don’t think this is so is because the OBV is already well above the highs made in 2007, line B. Even though HPQ went as low as $37.23 in August, the OBV held above this support. A move in the OBV through the weekly downtrend (line A) would be a positive development.
Despite the severity of the drop from the April highs, HPQ did hold above the 61.8% support level at $36.52. The price pattern of the rally since the August lows could be interpreted as just an interruption in the downtrend, as HPQ has just reached the 50% retracement resistance level at $46.14. The more important 61.8% resistance is at $48.21.
Even though the technical action is not yet conclusive, the key will be how HPQ acts on the first significant pullback. I would recommend buying HPQ in the $43.35-$43.77 area with a protective stop at $40.59.
My final pick for this tech stock portfolio is a small cap, low-priced, data storage company called Hutchinson Technology (HTCH), which has had a volatile price history in the past year. From a high of $11.41 in early 2010, it reached a low of $2.74 this summer, testing the support going back the 2009 lows, line B. The key short-term resistance is now in the $3.90-$4.00 area, and a strong close above this level will increase the odds that a bottom has been completed. The initial upside target in such a case would be the 38.2% retracement resistance just above $6.00. The OBV is trying to bottom and is now back above its weighted moving average (WMA). The 50-day average volume in HTCH is just over 300,000, and a strong close on over one million shares is likely to be significant. I would like to buy HTCH in the $3.24-$3.46 area with a stop at $2.93.
I will be following up on all the stocks in this portfolio in the Charts in Play section at MoneyShow.com. This means I may adjust the buy and stop levels, and of course, report back on the progress of these tech stock recommendations.
Tom Aspray, professional trader and analyst, serves as senior editor for MoneyShow.com. The views expressed here are his own.
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