Four Longs in the Tech Sector

At a glance, it doesn't make sense that tech stocks are getting beaten up more severely than other market groups in this year's sharp downturn. After all, these issues have stronger growth prospects than most of the market, as well as little or no exposure to the derivative instruments causing extreme pain to company balance sheets worldwide.

Additionally, a drawn-out recessionary period is less likely to hurt the tech sector than equities in more economically sensitive groups, like retail or industrial production. But that doesn't seem to matter because these stocks have been pounded mercilessly in this mortgage mess, with many fine babies getting tossed out with the toxic bathwater.

Just look at the horrific performance numbers in the 2007 leadership of the Nasdaq 100 index so far this year: Apple (AAPL Quote) down 40%, Google (GOOG Quote) down 40% and Research In Motion (RIMM Quote) down 17%. Sadly, all these stocks, except for RIMM, are still trading near yearly lows and capable of breaking those levels before starting long-term recoveries.

It's clear that more than fundamentals are at work in the tech stock selloff this year. Forced hedge-fund selling is the most likely culprit, with this fast-money crowd forced to dump winning positions in tech and other growth issues in order to raise capital to cover derivative losses and pay redemptions to investors that are looking to get out.

It's impossible to tell how long this slow bleed will continue, because we don't fully understand the depth of losses faced by this relatively unregulated industry. We do know the number of hedge funds is shrinking rapidly, so perhaps we're getting closer to the day when pent-up demand finally overcomes the heavy forces of gravity.

In the meantime, loyal tech investors are waiting anxiously for their favorite stocks to find sustainable lows and recover a fair share of their extensive losses. There's also a little bit of good news on the horizon. A handful of tech companies have been spared heavy selling pressure during this crisis and look poised to move higher.

I've picked out four tech stocks that have held up well through this historic credit crisis. Rapid gains in these maverick issues might have to wait until the broad market stabilizes. But we can get them onto our watch lists now, so we're ready to act when the long-overdue tech recovery finally gets under way.

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Chunghwa Telecom

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Source: eSignal

Chunghwa Telecom (CHT Quote) is the top telecom provider in Taiwan. It hit a rally peak near $22 in 2005 and dropped into a long consolidation period, with resistance at the high. It finally broke out in February, gaining a couple of points before the move stalled out about two weeks ago. The stock is now pulling back and filling the breakout gap.

Look for a continued decline that drops price back into support near $22. Under normal conditions, that price level would offer an excellent "second-chance" trade entry, but considering broad market weakness, a spike into the seven-month trend line near $21 looks like a safer place to get on board.

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Western Digital

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Source: eSignal

Storage giant Western Digital (WDC Quote) has been a pick in my newsletter, "The Daily Swing Trade," for the last six weeks. The stock bounced strongly at the January low and rallied to a 10-year high in late February. It then pulled back to the breakout level and pivoted into 50-day exponential moving average support in Monday's session. I doubt this level will hold the decline.

Most likely, the stock is grinding through an A-B-C correction that will drop price back to $27. Realistically, it may even fill the gap under $26 before starting a decent basing pattern. So I'd stand aside on this one for now and watch from a distance in the next few weeks. We could see the pattern set up an excellent buying opportunity for a run back to the high.

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Salesforce.com

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Source: eSignal

Salesforce.com (CRM Quote) builds customer management software. The stock jumped to an all time high at $65.52 in December and started to pull back. It found support in the mid-$40s after a volatile period marked by a series of sudden reversals. Price rocketed higher two weeks ago on heavy volume after the company reported solid earnings.

The vertical rally lifted the stock above resistance at the 50-day moving average. It's been pulling back and testing that level for over a week now. Price should find renewed buying interest soon and start an uptrend that reaches into the December high. Further gains will depend on broad market stability in the second quarter.

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NetEase.com

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Source: eSignal

Let's look at Chinese web portal NetEase.com (NTES Quote) in the long-term view. The stock has been listed on the U.S. exchanges since 2000, when it was trading under 2 bucks. It lifted to an all time high at $25.49 in April 2006 and dropped into a broad sideways pattern. It jumped back to resistance in November of last year and rolled over once again.

Price is slowly working its way back into the mid-$20s, where it will have another opportunity to test the multiyear high and start a sustained uptrend. The technical pattern off the 2007 low is quite constructive, especially in a market that's showing so little buying interest. This is a great one to stalk near the highs for an eventual breakout signal.

Alan Farley provides daily stock picks and commentary with his "Daily Swing Trade" newsletter.