Wednesday, November 16, 2011

Musings on the Tech Sector’s Breakout Point

Do you believe in the Santa Claus rally? If you're among those expecting the
traditional year-end uptrend in stock prices, you may want to consider the
technology sector as the hunting ground for your next trade. Here's why: based
on the Select Sector SPDR-Technology ETF (NYSE: XLK ), the sector is nearing the
point where it could break out above major resistance at $27.09. This marks the
fourth occasion in 2011 where XLK has approached this level, so a move above it
would likely provide a green light for a nice trading rally. The last time XLK
broke out above a resistance area was in November 2010, and it went on to post a
12.5% gain in the next four months. One caveat: the ETF still needs to rise
another 3.5% to reach $27.09, so we have a way to go. Still, there are two
reasons to keep an eye on this chart. First, December has brought a gain for the
broader market in 17 of the past 20 years, with an average gain of 1.99% in the
month. If past is indeed prologue, similar strength in the month ahead would
likely bring the XLK near a breakout point. Second, based on the SPDR sector
ETFs, XLK is the only nondefense sector trading above its 200-day moving
average. (The others are utilities, consumer staples, and health care.) This
indicates that technology is showing a good deal of technical strength relative
to other economically sensitive sectors that are still trading under their
200-day MAs, such as materials and industrials. With all of this said, is the
best bet to play the XLK or individual stocks? Few of the largest tech stocks
have printed a chart that looks like the XLK, but there are still plenty of
technology names that are sitting just below their potential breakout points on
the one-year chart. Use the list below as a jumping-off point for further
investigation into possible trade candidates. All are above their 200-day MAs
and trading within striking distance of their previous highs. The list is
ordered from the most interesting charts to the least: ARM Holdings (NASDAQ:
ARMH ) Rackspace Hosting (NYSE: RAX ) TIBCO Software (NASDAQ: TIBX ) Maxim
Integrated Products (NASDAQ: MXIM ) Google (NASDAQ: GOOG ) Check Point Software
Technologies (NASDAQ: CHKP ) IBM (NYSE: IBM ) Micros Systems Inc. (NASDAQ: MCRS
) Of these, the U.K.-based chip designer ARM Holdings appears to be the most
compelling from both a technical and fundamental standpoint. The stock has been
flirting with its breakout point, in the $32 range, for over a year now, and has
the look of a stock ready to move out to new highs in a favorable tape. The
stock isn't cheap, with a forward P/E of about 44, but it's growing fast
through its exposure to the mobile and tablet markets via the various companies
that use its designs, such as Apple (NASDAQ: AAPL ), Qualcomm (NASDAQ: QCOM )
and Nvidia

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