(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 has had a monster run since September 25, rising by nearly 10 percent, as measured by the Technology Select Sector SPDR ETF (XLK). Over that period, the ETF has outpaced the S&P 500 Index by almost six percentage points, led by significant gains in Apple Inc.(AAPL), Microsoft Corp.(MSFT), Facebook Inc (FB), Alphabet Inc. (GOOGL), and Intel Corp. (INTC ).

But a technical analysis of the current trading pattern suggests the group is due for a pullback of at least 5 percent or more in the ETF, which could lead to a much more significant move lower for many prominent technology names. 

Gapped Higher

The sector gapped noticeably higher on October 27 after significant earning results were reported by Alphabet, Microsoft, Intel, and Amazon.com (AMZN), creating a gap in the chart of the technology ETF.

To fill the gap, the ETF would need to fall to a level around $61, from its current price of $63.70, which is a fall of about 5 percent. This would likely translate into a much more significant decline for many technology companies. 

 

 

 

Trading Channel

From a longer-term perspective, shares of the technology ETF have traded within a well-defined trading channel since the overall market lows of February 2016. More recently, the ETF rose to levels outside of that trading channel, with the last such occurrence in May and June of 2017. Over the summer, the tech sector saw a sharp sell-off that dragged the industry back to the lower end of the trading channel.

The current setup in the chart implies that the sector is currently stretched. It could have room to fall by at least 5 percent if it wants to get back to the upper portion of the trading channel, and as much as 8.5 percent should it trade toward the lower end.

 

 

It is worth noting that in mid-September, the sharp rise in the group could have altered the course of the tech ETF, with a new trend developing. It may be too early to make such a prediction, but should the ETF trace along that new uptrend, we could expect an acceleration in the tech sector's rise. (See also: Tech Stocks Are Ready to Rally Once Again.)

Intel Pull Back

Shares of Intel are showing a similar short-term pattern as that of the broader technology ETF. Intel has the potential to fall by nearly 10.5 percent from its current price of $46.50 back to $41.60.

In an Investopedia article on October 16, we noted that the stock was breaking out. (See more: Intel and Qualcomm Could Rise 20%: Technical Analysis.) And while the shares have rallied from roughly $39.50 – an increase of 17 percent since then – a pullback would likely be short-lived and temporary. 

 

 

 

The sector looks stretched currently, but any pullback may get a short-term blip in an otherwise long-term uptrend. 

Michael Kramer is the Founder of Mott Capital Management LLC, a registered investment adviser, and the manager of the company's actively managed, long-only Thematic Growth Portfolio. Kramer typically buys and holds stocks for a duration of three to five years. Click here for Kramer's bio and his portfolio's holdingsInformation 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 recommendations made during the past twelve months. Past performance is not indicative of future performance.

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