What 2007 Holds for Big Tech

This column was originally published on RealMoney on Dec. 19 at 11:02 a.m. EST. It's being republished as a bonus for TheStreet.com readers. For more information about subscribing to RealMoney, please click here.

Let's take a step back and look at the Nasdaq's most popular stocks through a longer-term lens. This positioning analysis might help investors decide what to do with these widely held issues as 2006 draws to a close. It could also uncover the most promising new plays when we come out of the starting gate in January.

Keep in mind that market leadership often shifts gears when the calendar turns, so this year's leaders could easily become next year's laggards.

Many folks hold top-performing positions into January, then unload them to take advantage of the new tax year. This generates downward pressure on strong stocks that often yields significant reversals.

Aggressive traders play this well-known phenomenon by selling short a basket of overextended leaders in the last few days of the year, then covering their positions into an early January selloff. I'll have a list of top prospects for this interesting trade setup in a post-Christmas-day column.

The monthly view captures Microsoft's (MSFT Quote) strong 2006 recovery in great detail. In particular, note how Mister Softee shows seven white bars in a row, signifying higher monthly closes. This is clearly institutional accumulation ahead of the company's long-awaited Vista operating system release. But what if product sales don't live up to all the hype?

It's bullish that price rallied above the three-year rising channel between 20 and 28. That pattern was a major roadblock to long-term progress. But a larger challenge now looms at the 2000 and 2001 recovery highs in the mid 30s. These resistance levels could stall the uptrend in the first quarter of next year, right after Vista's sales numbers come out.

Cisco Systems' (CSCO Quote) long-term chart shows a healthy run off the two-year basing pattern just above 20. This persistent rally has attracted a wealth of capital looking for an uptrend that carries the stock back to the height of its millennium glory days. But a major obstacle now stands in the way at the 2004 high above 29.

This resistance level should deflect the uptrend in early 2007 and start a correction that lasts well into the second quarter. The pullback would test this year's gains and could reach 22 before a solid base sets up for a recovery back to the highs. That rally should be bought for a breakout that pushes the stock over 30 in the second half of next year.

There still isn't much to love in Intel's (INTC Quote) weekly chart, despite numerous attempts to lift the semiconductor sector in the fourth quarter. The stock is still caught in a major downtrend that shows no signs of letting up. Don't be fooled by the rally off the summer low. Price has failed to carve out a single higher high during this feeble recovery attempt.

The rally fizzled out in October when price hit resistance at the November 2005 low at 23.69. The stock tagged a marginal new high last month, but the uptick faded quickly and price rolled over into a potential topping pattern above 20. Things could go either way right here, and there's no apparent edge in holding long or short positions at this time.

In a twist of fate, Yahoo! (YHOO Quote) hopes to become the next Google (GOOG Quote) in 2007. The stock has been on a downward trajectory throughout this year, as Google one-ups the company on every attempt to regain lost customers. The good news is the weekly chart hasn't printed a new low since mid-October, but that's about it.

The stock carved out a major top in 2005, which then broke on heavy volume in July of this year. Note the recovery attempt that was turned away at broken support near 30. Also note the series of lower lows, marking a persistent downtrend that shows no signs of letting up. Unfortunately this Net pioneer could go much lower in 2007.

Let's look at Dell Computer (DELL Quote) in the really big picture. The stock rose dramatically through most of the last decade, topping out at 59.69 when the bubble burst in 2000. It then found its bear market lows quickly and ticked higher for three years before getting caught in a virulent downtrend in 2004. That decline finally bottomed out this summer.

The post-summer rally looks like a weak correction within a primary downtrend. Of course, you might have profited on the long side during the bounce, but the odds still favor a rollover that retraces most of the 2006 recovery. However, that might not happen until the stock rallies another few points and reaches resistance in the low 30s.

Last month I noted that Apple Computer (AAPL Quote) was approaching its January top near 86.50. The stock charged through this level a few weeks ago, but the move stalled out quickly, and price is now pulling back. The unstable pattern off the summer low still exposes shareholders to a correction that could drop price back to 70 in coming months.

Protect your well-deserved profits on this one. The best scenario would be a correction through time rather than price, with the stock going dead and winding through a sideways pattern between 80 and 85. That would lower the emotional fires on this overloved issue and set the stage for a sustainable breakout in the first half of 2007.