BALTIMORE (Stockpickr) If you own a lot of tech stocks, you have my condolences. The tech sector has been a performance drag in 2014, barely holding above break-even while the S&P 500 has fought its way almost 5% higher since the calendar flipped to January. But that could be about to change.
As the broad market muscles its way to new highs this summer, the tech sector is starting to get some love again. But not all names are created equal. Some tech issues are going to deliver stellar outperformance in the next few months, while others will continue to auger themselves into the ground. So to find the winners this week, we're turning to the technicals to identify five attractive trades from the technology sector.
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 technology behemoth Microsoft (MSFT), a name that's been outperforming the rest of the tech sector -- and the S&P 500 itself -- this year. MSFT is up more than 9% in 2014, but that looks like just the beginning. Shares are breaking out this week.
Microsoft spent the last two months grinding sideways in a symmetrical triangle, or "coil" pattern, bouncing its way sideways between a pair of converging trend lines. Consolidation patterns like the symmetrical triangle are common after big moves -- they give investors a chance to catch their breath and figure out their next step. The buy signal comes on a breakout to the topside of the pattern, in this case right below $40.50. That buy signal triggered on Friday, giving investors the green light to get into MSFT again.
Relative strength adds some important backup for a buy signal in Microsoft. That performance indicator has been in an uptrend since back in January, a signal that MSFT is continually outperforming the S&P in good times and in bad ones.
Chipmaker NXP Semiconductors (NXPI) is showing traders a triangle setup of a different sort this week. Like Microsoft, NXPI has been a stellar performer in 2014, rallying more than 35% since the calendar flipped to January. And now shares look ready for a second leg higher thanks to an ascending triangle pattern.
NXPI's ascending triangle setup is formed by horizontal resistance above shares at $63 and uptrending support to the downside. Basically, as this stock bounces in between those two technical levels, it's getting squeezed closer to a breakout above that $63 price ceiling. When that happens, NXPI becomes a high-probability trade. Coming into this afternoon's trading, NXPI is pressing up against that breakout level for a fifth straight session. Wait for a close above $63 for confirmation of the move.
The exact same setup is in play right now for shares of Corning (GLW). Like NXPI, this high-tech glassmaker is forming an ascending triangle pattern -- in this case, the resistance level to watch comes in at $21.50. The high-probability buy signal comes on a push through that level.
Why all the significance at $21.50? It all comes down to buyers and sellers. Price patterns are a good quick way to identify what's going on in the price action, but they're not the reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for Corning's stock.
The $21.50 resistance level is a price where there has been an excess of supply of shares; in other words, it's a spot where sellers have previously been more eager to step in and take gains than buyers have been to buy. That's what makes a breakout above $21.50 so significant. The move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Momentum, measured by 14-day RSI, is the confirming indicator to look at in this stock. Our momentum gauge has been making higher lows, even while GLW has mostly traded flat in the ascending triangle pattern. That's a good indication that buyers are getting more aggressive heading into the summer. Still, wait for the breakout before you buy.
You don't have to be an expert technical trader to figure out what's going on in shares of TE Connectivity (TEL) -- the setup in this $24 billion electrical component stock is about as simple as they get. For the better part of the last year, TEL has been bouncing higher in an uptrending channel, a pair of parallel trend lines that have given traders a very high-probability range for shares to remain with.
Put another way, an ideal buying opportunity has come up for TEL bulls every time this stock has bounced off of trendline support along the bottom of the channel. When it comes to trend channels, up is good and down is bad it's really as simple as that. So, with TEL's chart moving up and to the right, this is a "buy the dips" name.
That said, the optimal time to buy isn't just near trendline support; you want to wait for a bounce off of support. Waiting for a meaningful bounce off of support is crucial for two big reasons: it's the spot where shares have the furthest to move up before they hit resistance, and it's also 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 TEL can actually still catch a bid along that line before you put your money on shares.
Last up is Dolby Laboratories (DLB), the mid-cap video and audio technology developer. Since March, Dolby's price action hasn't exactly been what you'd call constructive. Shares got swatted down off of $45 resistance at the beginning of March, and this chart has looked pretty ugly ever since. But zoom out to a longer timeframe, and suddenly the context for Dolby's correction looks a lot more attractive.
Dolby is in the early stages of forming an inverse head and shoulders pattern, a classic technical 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 bigger trough called the head; the buy signal comes on the breakout above the patterns neckline level, currently right at $45 resistance.
That makes another test of $45 look very likely in the next couple of weeks. But even if the right shoulder never forms in this setup, it makes sense to buy the breakout above $45. Textbook pattern or not, the trading implications are exactly the same if DLB can manage to catch a bid above that level. When it does, keep a tight stop in place.
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.