As we move into September, technology is back to being the hottest ticket on the street. The Technology Select Sector SPDR (XLK), the biggest ETF by assets tracking the sector, hit a new high Thursday on the heels of a broader climb in the general market.
The gains were led in part by the "FANG" stocks, Facebook Inc. (FB), Amazon.com Inc. (AMZN), Netflix Inc. (NFLX) and Google parent company Alphabet Inc. (GOOGL). Looking ahead to the next week of trading, these stocks look strong given their respective technical backdrop.
While low volume was expected this week, tech rallied, and the XLK is showing signs of a positive technical setup. First, the Moving Average Convergence Divergence (MACD) made a bullish reversal, indicating that the recent consolidation is over and a new rally is starting. Second, we are seeing a close above the upper Bollinger Band, which means that the uptrend is intact.
While it might also signal that the XLK is a bit overbought in the very short term, when a stock touches the upper (or lower) Bollinger Band it is a sign that the bullish (or bearish) trend is continuing. In this case, because it touched the upper Bollinger Band, it is a bullish sign.
Lastly, the Directional Movement Index (DMI) gave a buy signal, as the +DI indicator crossed above the –DI indicator, which means that the directional movement in the XLK is upward. It is important that the XLK holds the $57 level as this was support all throughout the month of August. A move below this level would negate the bullish technical signals as it would signal a false breakout.
There are a few reasons why technology might start to outperform again. First, there are no clear negative headlines for the market (at least while Congress is on recess). Second, financial stocks were leading the market earlier this summer on the belief that the Federal Reserve was going to raise interest rates again this year. Since that's no longer the case, financials have been lagging and money seems to be flowing into technology.
The Bottom Line
With the technology sector, represented by XLK, finishing out the month strong, tech stocks look like they should continue to rally in the weeks ahead. And as long as we see few negative headlines out of Washington, the upward trend seems to be intact on the heels of strong momentum.