BALTIMORE (Stockpickr) -- It's hard to believe, but after a weak start to the year, the tech sector is the place to be in August. From a relative strength standpoint, there's no other sector that looks as strong as technology this summer -- and naturally, that's driving some high-probability trades in tech.
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.
We're starting simple today -- and the chart setup in shares of tech giant Microsoft (MSFT) is about as simple as they get. You don't need to be an expert technical trader to figure out what's going on in shares of Microsoft. Shares have been bouncing their way higher in a well-defined uptrending channel for the better part of the last year. Now it makes sense to buy the next bounce off of trend line support.
It's not enough that this stock has been moving higher. Instead, Microsoft's uptrend has been bounded by a pair of well-defined parallel trend lines that identify the high-probability range for shares to trade within. When it comes to trend channels, up is good and down is bad -- it's really just as simple as that. Every successive test of trend line support has provided an optimal entry point for traders looking for buying opportunities in MSFT, so as shares bounce off of support this week, it makes sense to buy on this stock's next white-bar day.
As of the most recently reported quarter, Microsoft was one of Ken Fisher's top holdings.
We're seeing the exact same setup in shares of Applied Materials (AMAT) right now. Like Microsoft, AMAT has been bouncing higher in an uptrending channel -- in this case since February. While Applied Materials lacks the trend duration (and the sheer number of tests of support) that MSFT's chart has seen, this name is still a "buy-the-dips stock". From here, it makes sense to buy the next bounce off of the lower trend line.
Waiting for a bounce off of trend line support is a key risk management strategy for AMAT 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 Applied can actually still catch a bid along that line before you put your money on shares.
Keep your stops just below the bottom of this price channel. If shares violate support, you don't want to own it anymore.
The Argentine default isn't having negative effects on shares of the country's incumbent mobile phone company. Shares of Buenos Aires-based Nortel Inversora (NTL) are looking bullish right now, on the heels of a 20% year-to-date return. Here's how to trade it.
NTL is currently forming an ascending triangle pattern, a bullish setup that's formed by horizontal resistance above shares (in this case at $26) and uptrending support to the downside. Basically, as NTL bounces in between those two technically important price levels, it's getting squeezed closer to a breakout above that $26 price ceiling. When that happens, we've got a buy signal in shares.
Nortel is showing a perfect example of relative strength in the sector; this stock's relative strength line has been in a solid uptrend since the middle of March. Nortel's relative strength uptrend means that this stock isn't just moving higher -- it's also outperforming the S&P 500 along the way. As long as relative strength keeps making higher lows, this stock should keep beating the rest of the market.
Application delivery network technology firm F5 Networks (FFIV) has been a stellar performer in 2014. Since the calendar flipped to January, F5 has rallied close to 24%. But don't worry if you missed the move -- FFIV is a breakout trade of a different sort to watch this week. That means this stock could be in store for more of the same in the second half of the year.
F5 Networks is currently forming a rounding bottom pattern, a price setup that looks just like it sounds. The rounding bottom indicates a gradual shift in control of shares from sellers to buyers -- and while FFIV's pattern isn't quite textbook (it's showing up at the top of this stock's recent range, not the bottom), the trading implications are just the same. The breakout happens on a move through $115.
Why all of that significance at $115? 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 actual reason a stock is tradable. Instead, the "why" comes down to basic supply and demand for F5's stock.
The $115 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 $115 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Last up is Flextronics International (FLEX), a mid-cap supply chain technology stock that's showing traders a classic technical setup this week. FLEX is in the early stages of forming an inverse head and shoulders pattern, a bullish setup that signals exhaustion among sellers. After the 35% rally shares have been on this year, it's no surprise that sellers are exhausted.
The inverse head and shoulders 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 pattern’s "neckline" level, currently right at $11.50 resistance. This isn't a textbook pattern (just like the setup in F5, it's coming in at the top of FLEX's recent range, not the bottom), but that doesn't change the trading implications on a move through the $11.50 level. Likewise, even though the right shoulder hasn't formed yet, a breakout above $11.50 is still buyable.
Zooming out longer-term, FLEX's setup is forming within the context of a pretty well defined uptrend -- the head in this pattern coincides with trend line support for the uptrend. That secondary price floor provides even more downside protection for this pattern right now. Still, it's key to wait for $11.50 to get taken out by buyers before jumping into this trade. Don't be early.
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.