The technology sector is a great place to measure sentiment. When traders are bearish they sell technology stocks and when they are bullish they buy technology stocks.
We're starting to see a bullish change in relative strength for the Nasdaq and relative strength in the Nasdaq suggests that bullish sentiment is starting to creep back into this market. The change is nascent, but it's interesting and it's yet another data point that supports the idea of a bullish improvement in this market. Traders can look for opportunities on the long side from the large-cap technology names, which are multinational and benefit from strong foreign growth and the weak dollar. We are looking at Hewlett Packard
(HPQ)
.
First, let's see where the sector stands. We are seeing a bullish change in comparative relative strength for the Nasdaq-100 vs. the S&P 500 as well as a more recent improvement in the broader Nasdaq vs. the S&P 500. We believe this change in relative strength is due to an improvement in sentiment from very bearish levels.
The Nasdaq 100 and Nasdaq led when the market turned to the downside and have shown poor relative strength in the recent bear market even though the group is underweighted in the financial stocks. In most cases the technology stocks at the core of these indices haven't even fully recovered from the last bear market in 2001.
The fact is that this group is sensitive to sentiment and when traders are bearish or bullish the bias is strongly reflected in the Nasdaq as traders seek higher beta directional bets. The Nasdaq is currently showing a bullish momentum divergence at the recent lows. This divergence shows that this group is losing downside energy. We have also seen failures in bearish continuation patterns in some of the tech indices such as the computer index (.XCI). Failed bearish patterns can be very bullish as they can catch traders flat footed on the wrong side of the trade and force shorts to cover quickly.
The Nasdaq has also built a bullish divergence in the 40-day SARSI indicator, which shows an underlying bullish current in the index.
An individual large-cap technology stock that traders can focus on is Hewlett Packard. HPQ was a strong name in the group and acted as leadership in the sector prior to the bear market decline in late December. HPQ corrected sharply then and has since formed a bullish double bottom reversal pattern. This is a minor reversal pattern and marks the low in the intermediate-term corrective cycle for HPQ. The stock has broken out over the neckline of the formation and has since pulled back and consolidated the gains. HPQ has a bullish setup in place to continue the uptrend. The stock is back on the offensive and it's showing us bullish energy.
Traders can get long HPQ at this level and use a failure of the neckline at $45 as a stop loss. If bullish sentiment starts creeping into this market after some of the highest bearish sentiment readings we have seen since 2002, the Nasdaq and the technology sector could produce some relative outperformance in the weeks and months ahead. Hewlett Packard is in a strong technical position to benefit from any bullish change in the technology sector and the stock should act as leadership in the group.
At the time of publication, John Hughes and Scott Maragioglio had no positions in stocks mentioned.
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.
