In the past quarter, the S&P 500 has delivered total returns of 7.3%. And while that's an impressive run for a three-month stretch, technology stocks have been doing materially better. In those same three months, the iShares Dow Jones U.S. Technology Sector ETF (IYW) has handed investors total returns of 9.9%.
That's a meaningful amount of outperformance versus the broad market, and it's magnified when you focus exclusively on the high-probability setups that are taking shape around the tech sector this summer. So today, we're taking a closer 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 $53 billion IT consulting giant Accenture (ACN). Shares of Accenture haven't exactly shown investors blockbuster performance this year; since the calendar flipped to January, ACN is down 1.4%. But zoom out a bit, and the price action in Accenture starts to look a whole lot more constructive. Here's how to trade it.
Accenture is currently forming an ascending triangle pattern, a bullish technical setup that's formed by a horizontal resistance level above shares (in this case at $84), and uptrending support to the downside. In a nutshell, as ACN bounces in between those two technically important price levels, it's getting squeezed closer to a breakout above that $84 price ceiling. When $84 gets taken out, we've got our buy signal.
Momentum, measured by 14-day RSI, is the confirming indicator to look at in this stock. Our momentum gauge has been making higher lows since the start of the year, making its way higher in a shallow uptrend. Since momentum is a leading indicator of price, it adds some confidence to an upcoming breakout in ACN.
Remember, this isn't a high-probability trade until $84 gets taken out.
We're seeing the exact same setup in shares of mobile chipmaker Qualcomm (QCOM). Like Accenture, Qualcomm is forming an ascending triangle setup, in this case with resistance up at $81. That's the breakout level that traders should be keeping an eye on this week -- and QCOM is pressing up against it in today's session.
Why all the significance at 81? 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 Qualcomm's stock.
The $81 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 $81 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Wait for that breakout before you buy.
A triangle of a different sort is the catalyst to trade in shares of hard drive maker Seagate Technology (STX). Since the start of the year, Seagate has looked "toppy" thanks to a long-term descending triangle setup in shares. The descending triangle is the bearish opposite of the ascending triangle we're watching in ACN and QCOM -- it's formed by a horizontal support level to the downside and downtrending resistance pressing shares lower.
But the breakdown below $48 support never triggered. Instead, STX broke out above its resistance downtrend, invalidating the bearish trade. An aborted bearish price setup is generally every bit as good for longs as an outright bullish one, and that's what makes Seagate look buyable here.
Shares of STX pressed above their most recent swing high at $58 late last week, as increasingly eager buyers piled into this stock on the bullish turn in sentiment. From here, look for a successful test of $62 as the last barrier before STX has room for considerable upside. Earnings on July 17 could add some event risk to the mix next week, but shares still look buyable here. If you decide to jump into the STX trade, keep a protective stop in place at the 50-day moving average.
You don't need to be an expert technical trader to figure out what's going on in shares of small-cap tech name Diodes (DIOD) -- a quick glance at the chart should pretty much tell you the whole story in this stock. DIOD has been a "buy the dips stock" all the way back since late November, and now, as shares come of a dip at the end of June, there's another high-probability buy here.
When it comes to uptrending channels, you don't just want to buy near trend line support. Instead, it's key to actually wait for a bounce higher off of the bottom of the trend line. Waiting for a bounce off of trend line support is a key risk management strategy for DIOD buyers 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 Diodes can actually still catch a bid along that line before you put your money on shares.
Our bounce is happening this week.
DIOD is also exhibiting some outstanding relative strength right now, an indication that shares are outperforming the broad market as we head into the second half of 2014. As long as that uptrend in relative strength stays intact, this name should keep outperforming the S&P 500.
Last up is SunEdison (SUNE), a stock that's already posted some stellar performance in 2014. Since the beginning of the year, SUNE has rallied nearly 68%, outperforming the rest of the equity market by just about every measure. But after a breakout at the end of June, SUNE looks ready to start on another rally leg.
After a huge run higher in the first quarter, SunEdison corrected and then started consolidating in a "rounding bottom" pattern, a price setup that indicates a gradual transition in control from sellers to buyers. The pattern's name is a pretty good description of how it looks on a chart. Even though SUNE's rounding bottom formed at the top of its recent price range (not the bottom), the trading implications are just the same. The buy signal triggered on a move through resistance at $21.
Now, though, a throwback in SUNE is giving traders a second chance at a low-risk entry in this solar stock. That former resistance level at $21 is now the support level that traders should try to get in as close to as possible. Just like with DIOD, wait for a bounce off of $21 to verify that SunEdison can still catch a bid there before you jump into the trade.
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.