3 Chart Patterns That Suggest It's Time to Trade Technology Stocks

The recent decline in Facebook, Inc. (FB) shares and the better-than-expected earnings from Amazon.com, Inc. (AMZN) have put the technology sector into the spotlight over the past several trading sessions. In this article, we'll take a look at what the charts of technology-focused exchange-traded funds (ETFs) are saying and try to determine how traders will look to position themselves over the days and weeks ahead. (For a quick refresher, see: Analyzing Chart Patterns.)

Technology Select Sector SPDR Fund

One of the most popular exchange-traded products that is used by retail investors for tracking the performance of technology companies is the Technology Select Sector SPDR Fund (XLK). Fundamentally, the ETF comprises 75 holdings and has a market value of more than $20 billion. Taking a look at the chart below, you can see that the price is trading within a defined range, which has helped set entry and exit prices for most traders for much of 2018. Traders will keep an eye on the converging trendlines because a break above the resistance would likely act as catalyst of a sharp move higher. Conversely, a close below the support near $71 would be used as a sign of a reversal and would likely lead to a major correction. As earnings season continues, the dotted trendlines will undoubtedly continue to play a significant role in the placement of orders. (For further reading, see: 3 Charts That Are Warning of a Pullback in Technology.)

Technical chart showing the performance of the Technology Select Sector SPDR Fund (XLK)

[If you'd like to learn more about drawing trendlines as well as pinpointing support and resistance levels, check out the Technical Analysis course on the Investopedia Academy, which includes videos and interactive content to help you improve your trading skills.]

Social Media

The social media sector has been a darling of the financial markets since the start of the uptrend in early 2017. Taking a look at the chart of the Global X Social Media Index ETF (SOCL), you can see that a triangle pattern has formed on the chart near the long-term support of the 200-day moving average. This chart is of specific interest to traders because the proximity of major support creates a lucrative risk/reward scenario and could lead to a sharp move depending on the direction of the breakout. If Facebook's recent decline is a leading indicator, one may expect the market to hold a downside bias and watch for a move below $34.71. (For further reading, see: What Technical Tools Can I Use to Measure Momentum?)

Technical chart showing the performance of the Global X Social Media Index ETF (SOCL)


Semiconductors are another segment of the technology sector that active traders will want to pay close attention to. Like the pattern shown on the chart of SOCL above, the VanEck Vectors Semiconductor ETF (SMH) is showing a defined triangle pattern near the major support of the 200-day moving average, creating one of the best risk/reward setups in the market. A close beyond either of the trenldines will be what traders use to confirm the momentum, and many may wait on the sidelines for this move in hopes of increasing the odds of making a profit. (For related reading, see: Analyzing Chart Patterns: Triangles.)

Technical chart showing the performance of the VanEck Vectors Semiconductor ETF (SMH)

The Bottom Line

The technology sector has been trading within one of the strongest uptrends in the market since 2017. The increased visibility of major tech companies due to volatile earnings suggests that the patterns highlighted above will invaluable over the coming days or weeks. (For more, see: The Utility of Trendlines.)

Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.

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