Tech Stocks on Verge of a Big Breakout

(Note: The author of this fundamental analysis is a financial writer and portfolio manager. He and his clients own shares of GOOGL.)

The technology sector, as measured by the Select Sector SPDR Technology ETF (XLK) has performed better than most sectors in 2018, down by just over 6%. But that is not saying much because the overall S&P 500 is down by nearly 8% on the year, while the financials, as measured by the Select Sector SPDR Financials ETF (XLF), is down by almost 10%. An analysis of the technical charts suggests the technology sector may be poised to breakout, and may rise by as much as 7% over the short term. 

With the majority of the big companies in the technology space such as Apple Inc. (AAPL), Microsoft Corp. (MSFT ), Facebook Inc. (FB), Alphabet Inc. (GOOGL), and Intel Corp. (INTC) all reporting strong results, many of the concerns and overhangs, such as weak iPhone sales, have now been removed. Additionally, some companies, such as Intel, have seen many analyst upgrades and upward price target revision following the results. (For more, see also: Intel's Stock Seen Jumping 16% on Raised Forecasts.)

XLK Chart

XLK data by YCharts

The chart below shows that the Technology ETF has been able to find strong support on two occasions in a region between $63 to $64. But also more recently, the ETF has started rising along a long-term uptrend which has been working higher since July of 2016. Meanwhile, a downtrend started at the end of January, and should the price rise above that downtrend; the ETF may rise back to its old highs around $71. This is about 7% higher than its current price of $66.25.

The chart also shows a relative strength index (RSI) that has been trending lower since peaking in late January. But more recently that trend has started to reverse from one that is falling, to one that is rising since late March. Volume levels have also been steadily declining since late March, in what could be a sign that selling pressure is starting to wane.

A breakout in the ETF would be a positive for the entire sector and would be led higher by the companies that make up the most significant weighting in the ETF, such as Apple with a 13.5% weight and Microsoft with a 12% weight.

It is entirely possible that the breakout fails to take hold, and instead reverses lower. Should a reversal happen, the ETF is likely to retest technical support between $63 and $64, a drop of about 3 to 5%. 

We should find out soon whether a breakout takes hold and technology stocks are once again off to the races. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the founder of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of two to three years. Click here for Kramer's bio and his portfolio's holdings. Information presented is for educational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any specific securities, investments, or investment strategies. Investments involve risk and unless otherwise stated, are not guaranteed. Be sure to first consult with a qualified financial adviser and/or tax professional before implementing any strategy discussed herein.Upon request, the advisor will provide a list of all recommendation made during the past twelve months. Past performance is not indicative of future performance.

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