Cybersecurity continues to be a dominant investment trend so far in 2018, and stocks from across the sector have recently been reaching new highs. With the surge in media coverage on events such as the report that a Tesla, Inc. (TSLA) cloud account that was hacked to mine cryptocurrency, investors are again on the hunt for ways to trade the rise that will likely occur across the sector due to fundamental need and demand for hacking-related solutions. In this article, we take a look at the charts of two cybersecurity-related exchange-traded funds (ETFs) and one of the components as potential short-term solutions for those looking for quick ways to add exposure. (For further reading, see: 3 Ways to Trade Cybersecurity in 2018.)
The recent pullback in the broad financial markets provided strategic active traders with lucrative entry positions in many popular segments such as cybersecurity. Taking a look at the chart of the PureFunds ISE Cyber Security ETF, you'll notice that the recent drop toward the long-term support of the 200-day moving average acted as a timely entry for those who were monitoring the charts. This long-term level of support is one of the strongest levels used for determining the placement of buy and stop orders, and as you can see from past price action, this strategy has worked nicely for those who follow HACK.
Furthermore, the subsequent bounce off of the major support level triggered a move beyond January's swing high near $33.50. The recent close above the dotted trendline is a technical breakout and is a popular buy signal that is used to trade a move higher. Generally, the flood of buy orders that follows a breakout like the one shown on the chart triggers a spike in volatility and momentum and provides active traders with a lucrative risk/reward setup. Traders will likely hold a bullish outlook on the HACK ETF until indicators start to turn bearish and the price moves back below key levels of support. (For further reading, see: 13 Ways to Invest in Cybersecurity.)
Another popular ETF that is used for gaining exposure to the cybersecurity segment of the technology and industrials sectors is the First Trust NASDAQ Cybersecurity ETF. In case you aren't familiar, this comprises 33 holdings and carries an expense ratio of 0.60%.
Taking a look at the chart, you'll see that the pattern looks nearly identical to that of HACK, and most traders will interpret the recent price action in the same manner as described above. Those who want to wait for a pullback may want to watch for a move toward the combined support of the horizontal trendline and 200-day moving average, which are both trading near $22.25. Those with experience will tell you that the risk of waiting for a pullback in a momentum-driven sector is that the price could keep moving higher and not provide a better entry. Based on the recent move, the timing and placing of buy orders will really hinge on risk tolerance and the trader's investment horizon. (For more, see: 2 Cybersecurity ETFs to Consider.)
By taking a look at the chart of Cyber-Ark Software Ltd., which is one of the top ten holdings of the HACK ETF with a weighting of 4.96%, you can see that the stock recently traded above the 200-day moving average for the first time in months and has also been able to close above the November high, which was near $46. This bullish price action is common across the charts of cybersecurity stocks, and traders will undoubtedly be watching closely for the momentum to continue higher. In the case of Cyber-Ark Software, target prices will likely be set near $53, which is equal to the entry price plus the height of the pattern. (For more, see: Why Is Cybersecurity So Important for Investors and Advisors?)
The Bottom Line
The recent spike in media stories related to hacking and cybersecurity threats suggests that this sector will continue to be one to watch throughout 2018. The bullish price action on the charts confirms that investors are taking notice, and the recent close above key resistance levels suggests that prices could be poised for a move higher over the short run. (For more on this topic, check out: How to Avoid Human Errors in Cybersecurity.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own any of the assets mentioned.