Chipmaker Plays Canary in the Coal Mine

The technology sector has moved lower along with the weakness in the broader market since April, but now we're starting to notice that select tech names are showing some interesting strength.

The group has been mixed, and we saw broad-based weakness in the sector after earnings reports from Microsoft (MSFT - commentary - Cramer's Take) and Google (GOOG - commentary - Cramer's Take) on Friday.

We'll be watching the technology sector closely in the coming weeks. The recent weakness in the commodity-related stocks suggests that group may be consolidating the gains made earlier in the year. If we see a bullish rotation toward the technology sector, we believe it would bode well for a broad-based counter-trend rally in the market off of the recent oversold conditions. What we're doing is viewing the technology stocks as the "canary in the coal mine" for the rest of the market.

One stock which is in a bullish technical position that traders may want to take a look at here is Atheros Communications (ATHR - commentary - Cramer's Take).

Atheros Communications is a semiconductor company that develops wireless connectivity chips for laptops, routers and other electronics, and works with PC makers such as Acer, Hewlett-Packard (HPQ - commentary - Cramer's Take), Lenovo and Toshiba.

Currently, Intel (INTC - commentary - Cramer's Take) is the strongest firm in the market for wireless chips in laptops and routers, but Atheros is gaining significant market share. Right now, the industry is in an upgrade cycle between wireless standards, which should keep demand robust in the short-term. Also, Intel is instead moving away from chips that directly compete with Atheros and concentrating on its new WiMax chips.

The shift in focus for Intel should lead to stronger pricing for Atheros' chips. The expansion of WiFi technology into consumer products such as cell phones should also lead to an expansion of the revenue base for Atheros moving forward.

The technical configuration for ATHR is interesting. This is a volatile stock, and the chart displays some choppy price action, but the run up since March and the recent bullish consolidation look interesting.

Atheros Communications

Click here for larger image.

ATHR has a bullish pullback in place which has formed since May of this year, which sets the stock up for a push through overhead resistance at $34.50. It has also developed a larger lateral consolidation formation since last year, and the overall look is bullish and constructive.

The strong relative strength vs. the broader market suggests that traders are recognizing improving fundamentals from the company. A breakout over resistance would put the stock back on the offensive and reassert the long-term uptrend. For interested traders, one could get long the stock at $34.50 and place a stop-loss at $31.50 which would represent failed breakout.

---

At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned, although positions can change at any time. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.