Tech Sector Nearing a 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 might want to consider the
technology sector as the hunting ground for your next trade. Click to Enlarge
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 still are 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