BALTIMORE (Stockpickr) -- After a long period of stock market underperformance, the tech sector is starting to look exciting for investors again. And that's creating some big opportunities in tech stocks this week.
Typically, technology sector outperformance is synonymous with bull markets. But not this one. Since last June, the S&P 500 has moved 10.3% higher, while the tech sector has only managed to move the needle 4.5%. By and large, technology names haven't fully participated in this rally.
But if the trading setups in big tech names are any indication, they could be about to make up for lost time. Today, we'll take a technical look at five of them.
For the unfamiliar, technical analysis is a way for investors to quantify qualitative factors, such as investor psychology, based on a stock's price action and trends. Once the domain of cloistered trading teams on Wall Street, technicals can help top traders make consistently profitable trades and can aid fundamental investors in better planning their stock execution.
Without further ado, let's take a look at five technical setups worth trading now.
First up is Micron Technology (MU), a name that's been one of the tech sector's shining momentum stars for the last year and change. Shares of MU have more than tripled in the last 12 months -- and this stock could have even further to go thanks to a bullish setup in shares.
Micron spent the last two months forming an ascending triangle pattern, a bullish price setup that was formed by horizontal resistance above shares at $24 and uptrending support to the downside. Basically, as MU bounced in between those two technical price levels, it was getting squeezed closer and closer to a breakout above resistance at $24. Taking out $24 was the buy signal in MU -- and it triggered on Friday.
Momentum, measured by 14-day RSI, adds some extra confidence to upside in Micron. The momentum gauge broke its intermediate-term downtrend at the same time MU's shares pushed through $24. Since momentum is a leading indicator of price, that's a good sign for bulls.
We're seeing the exact same setup in shares of solar power systems maker SunPower (SPWR), except this mid-cap solar name hasn't broken out yet. The breakout comes on a push through resistance at $34. When $34 gets taken out, buying shares becomes a high-probability trade.
Whenever you're looking at any technical price pattern, it's critical to think in terms of those buyers and sellers. Triangles and other pattern names are a good quick way to explain what's going on in a stock, but they're not the reason it's tradable. Instead, it all comes down to supply and demand for shares.
That $34 resistance level is a price where there has been an excess of supply of shares; in other words, it's a place where sellers have been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above it so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Wait for the breakout before taking the trade.
It's been a solid year for InvenSense (INVN); the small-cap motion interface device maker has rallied more that 36% in the trailing 12 months. And like the other technology stocks on our list of trading setups, INVN looks well-positioned for even more upside in 2014.
That's because INVN is currently forming a cup and handle pattern, a classic bullish price setup that's formed by a cup-shaped rounding bottom in shares that's followed up by a short-duration channel down. The buy signal comes on a move through the pattern's price ceiling at $21. Shares are pushing up very close to that level in today's session thanks to news that a lingering patent dispute is getting settled.
Like with MU, the 50-day moving average has been a pretty good proxy for support all the way up in shares of InvenSense. It makes sense to keep a protective stop below that level in case this trade loses traction.
Forget about the pattern names for a moment -- you don't have to be an expert technical analyst to figure out what's going on in shares of Infosys (INFY), the $32 billion Indian IT outsourcing firm. Instead, a quick glance at the chart is sufficient.
Infosys is currently bouncing higher in an uptrending channel, a price setup that's been in place since all the way back at the start of the summer. From a relative strength standpoint, this name has been holding up exceptionally well over that six-month span, with shares catching a bid on every test of the trend line support level at the bottom of the channel. So with INFY sitting at the bottom of the channel for a sixth time now, it makes sense to buy the bounce.
Waiting to buy off a support bounce makes sense for two big reasons: It's the spot where shares have the furthest to move up before they hit resistance, and it's the spot where the risk is the least (because shares have the least room to move lower before you know you're wrong). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring INFY can actually still catch a bid along that line before you put your money on shares.
Last up is Alcatel Lucent (ALU), the $10.5 billion French communications firm that's become a popular trading vehicle in the last couple of years. That huge liquidity in shares of ALU means that it's more likely to be technically obedient -- and considering the bullish setup in shares, that's a very good thing for anyone who owns shares.
Alcatel Lucent is currently forming an inverse head and shoulders pattern, a trading setup that indicates exhaustion among sellers. The pattern is formed by two swing lows that bottom out around the same level (the shoulders), separated by a deeper low (the head). The buy signal comes on a move through the neckline, which is right at $4.60.
So far, this pattern isn't complete -- it hasn't formed a right shoulder yet. But ultimately, for the reasons I mentioned earlier, that doesn't have a big bearing on the trading implications of ALU. If shares can catch a bid above $4.60, I'd be a buyer -- with a tight stop in place, of course. This stock is still a volatile name.
To see this week's trades in action, check out the Technical Setups for the Week portfolio on Stockpickr.
-- Written by Jonas Elmerraji in Baltimore.