You may not realize it, but the tech sector is posting double-digit returns in 2016. Year-to-date, the Technology Select Sector SPDR ETF (XLK - Get Report) is up 11.7% on a total returns basis, a run that leaves the rest of the S&P 500 distinctively in its dust.
For a year when outperformance has been hard to come by, tech stocks are offering up an awful lot of it. And there's reason to expect that momentum to hold up in the months ahead.
That's because, even after the double-digit rally we've already experienced this year in tech, a big chunk of the individual stocks in the sector are hanging near the verge of breakout territory. To take advantage of the positive sector trend for technology stocks, we're turning to the charts for a technical look at five tech trades that are breaking out this week.
In case you're unfamiliar with technical analysis, here's the executive summary: 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, here's a rundown of five technical setups that are showing solid upside potential right now...
Up first on our list of tradable tech stocks is $70 billion chip stock Broadcom Ltd. (AVGO - Get Report) . Broadcom has been a performance leader in 2016, rallying more than 28% since the calendar flipped to January. But don't worry if you've missed that upside move so far - this stock is signaling the potential for a second leg higher thanks to a textbook bullish breakout signal that's been shaping up in shares since September.
Broadcom is currently forming an ascending triangle setup, a bullish continuation pattern that signals that possibility for more upside ahead. The pattern is formed by a horizontal resistance line up above shares at $177.50, with uptrending support to the downside. Basically, as shares of Broadcom bounce in between those two technically significant price levels, shares have been getting squeezed closer and closer to a breakout through their $177.50 price ceiling. When that breakout happens, it's time to buy this tech stock - and shares are flirting with that breakout level as of this writing.
Relative strength, the indicator down at the bottom of Broadcom's price chart, is the additional piece of evidence for the breakout that investors should be paying attention to here. Our relative strength line, with measures this stock's outperformance versus the rest of the broad market, has been in a well-defined uptrend since February - as long as that uptrend in relative strength remains intact, Broadcom is statistically more likely than not to keep on outperforming. Wait for $177.50 to get materially taken out before you click buy.
We're seeing the exact same bullish price setup right now in shares of another chip stock: $99 billion mobile chip company Qualcomm (QCOM - Get Report) . Like Broadcom, Qualcomm has been forming a textbook ascending triangle setup since September. For Qualcomm, the breakout level to watch out for is resistance up at $70.
What makes that $70 level so significant for Qualcomm? It all boils down to buyers and sellers. Price patterns, like this ascending triangle setup, 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 QCOM's shares themselves.
The $70 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 $70 so significant - the move means that buyers are finally strong enough to absorb all of the excess supply above that price level. Like its peer, Qualcomm is flirting with that breakout territory this week. Wait for a close above $70 before you consider the breakout signal confirmed.
Advanced Micro Devices
It's been quite a year already for shares of $6 billion semiconductor stock Advanced Micro Devices (AMD - Get Report) . Year-to-date, this stock has rallied 142%, making it one of the biggest gainers in the S&P 400 Midcap Index. But despite the size of the move so far, upside in AMD hasn't necessarily run its course at this point; that's because AMD is showing traders a triangle of a different sort this fall...
AMD is currently forming a symmetrical triangle, or "coil" pattern, a setup that's formed by 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, currently right below the $7.50 level. If shares can catch a bid above $7.50, then we've got a strong indication that the sideways trading of the last two months is over and buyers are ready to resume the upside in AMD. Otherwise, if shares violate support just above $6.50, then the pattern is broken and it's time to sell...
At the same time, the constricting action of AMD's symmetrical triangle is setting shares up for a volatility squeeze. Since volatility is cyclical, periods of very low volatility are typically followed up by a swing to high volatility. That means that AMD's initial move is likely to be very fast - don't miss it. The first move outside the symmetrical triangle dictates the direction to trade it. Because AMD entered the pattern on an up-move, an upside breakout is the most likely outcome from this point.
You don't need to be a trading expert to figure out what's been going on in Facebook (FB - Get Report) so far this year - or why you should buy it. The price pattern in this big social media company is about as simple as they get. In fact, even though Facebook dipped hard at the start of the month on third quarter earnings results, that recent retreat is actually setting shares up for a buying opportunity. Facebook has been a "buy the dips stock" all year long - and it's showing traders another buyable dip this week.
Since January, Facebook has found itself corralled in a well-defined uptrending channel. That uptrend is formed on the chart by a pair of parallel trendlines that have identified the high-probability range for shares of Facebook to remain stuck within. Every test of the bottom of that price channel so far has provided investors with a low-risk, high-reward buying opportunity for shares of FB. So, as the social network comes off trendline support for the third time since February, it makes sense to buy Monday's bounce higher.
Actually waiting for that bounce is important for two key reasons: it's the spot where shares have the most room 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 the channel breaks, invalidating the upside trade). Remember, all trend lines do eventually break, but by actually waiting for the bounce to happen first, you're ensuring Facebook can actually still catch a bid along that line before you put your money on shares.
Mellanox Technologies Ltd.
Rounding out our list of technology sector trades is $2.2 billion fabless semiconductor stock Mellanox Technologies Ltd. (MLNX - Get Report) . The overall trend in Mellanox has actually been pretty unattractive for most of this year - while the tech sector has been rallying, this small-cap semi stock is actually down nearly 17% since it peaked back in April. But shareholders could be in store for a break here, as Mellanox carves out a bottom with a classic price pattern.
Mellanox is currently forming an inverse head and shoulders pattern, a bullish reversal setup that signals exhaustion among sellers. The pattern is formed by two swing lows that bottom out at approximately the same level (the shoulders), separated by a lower low (the head). The buy signal came on a move through Mellanox's neckline up at $44, a move that officially triggered with Monday's 2% pop higher in shares.From here, with the breakout confirmed, higher ground looks like the probable outcome for shares of MLNX. The minimum measuring objective from the inverse head and shoulders puts a 10% upside target on shares, but prior resistance even further up at $52 is likely to come into play as the next potential stumbling point for shares on the way up. If you decide to buy this breakout, it makes sense to park a stop on the other side of $41 support.