Techs Need to Get Going

06/23/2010 2:35 pm EST

Focus: STOCKS

John Bollinger

President and Founder, Bollinger Capital Management

John Bollinger, editor of Capital Growth Letter, views the technology sector as a linchpin of his bullish bias.

We have completed a classic Bollinger Band setup in the stock market. It is a “W” bottom. The W was followed by a Sign of Strength, which confirmed the validity of the pattern. These patterns are actually fairly common, and, in our experience, amongst the easiest to identify and act on. They often, though not necessarily, come at times of widespread disbelief in the wake of a decline that swings opinion to the bearish mode. The key is the two pushes to a low, the first of which has greater momentum even though the second usually records a new absolute low in price. It is that new low that serves as a bear trap, enticing the shorts and discouraging the longs.

The key to the pattern is the confirmation day, which must be a Sign of Strength, a day of greater than average range and/or gain and greater than average volume. In this case there were actually two Signs of Strength, a reversal day featuring greater than average range and a rally day featuring greater than average gain. The completion of this setup is an all-clear signal for the market and an indication that the intermediate-term trend is now up. In our experience these patterns are quite reliable. While we haven’t counted them, I’d guess they are more than 75% percent effective.

This correction has created a plethora of opportunities. Mostly they consist of pullbacks into logical areas of support, such as the prior breakout point, followed by a base building process delineated by the Bollinger Bands.

There are no changes to the allocations this month; our move into a 10% gold allocation has been fully justified by market action. Most likely the next change will be to raise some cash in the area of a market top or when the advance encounters serious resistance. One other potential change is an increase in the international allocation if/when world markets start gaining some relative strength.

We are recommending the sale of two stocks from the core portfolio. NASDAQ OMX Group (Nasdaq: NDAQ), and Southern Copper (NYSE: SCCO) One exchange stock is probably enough for this phase of the market, so we’ll stick with Intercontinental Exchange (NYSE: ICE), which is delivering superior performance. We have some copper exposure through the superior performing Freeport McMoran (NYSE: FCX), so selling the underperforming SCCO frees up some capital for other ideas.

Three sectors that weathered the correction well and look ready to participate in an expansion are media,
technology, and transportation. Of special interest is technology, which is developing a bit of short-term
momentum that will help its intermediate and long-term rankings as well.

In a related vein, we think that technology leadership will be an important factor in the longevity of the nascent rally. Without it, the intermediate-term resistance discussed earlier may not be overcome.

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