Does Profit-Taking in XLK Spell Trouble for Tech?

For traders looking for follow-through to the upside after Monday’s strong move higher, the reversal in technology stocks, basis the Technology Select Sector SPDRS ETF (XLK), was a real wet blanket.

XLK fell by half a percent in Tuesday’s trading, just enough to relieve overbought conditions that had started to develop in the stock after Monday’s gains. Dragging the tech ETF lower was aggressive selling in Corning (GLW), which took the stock down by more than 10% as part of a multi-day correction. But also moving lower on Tuesday were stocks like Ebay Inc. (EBAY) and Sandisk Corp (SNDK), both off by more than 3%.

In the long run, the selling in XLK could prove productive insofar as it relives the kind of overbought pressure that can drive an ETF too far too fast to the upside. This typically attracts the attention of short sellers looking for markets that have become ripe for a short-term reversal. But if XLK can pullback modestly each time it becomes overbought, the fund could find itself back in bull market territory without drawing the suspicions of traders looking to sell strength before the fund climbs back above its 200-day moving average.

That said, selling in XLK remained significant and if traders and investors become less risk-seeking, the fund could see a second consecutive lower close. With stocks like Apple (AAPL), Microsoft (MSFT) and IBM (IBM) all lower ahead of trading on Wednesday, and XLK trading nearer to overbought territory than oversold territory, another day or two of selling to return the fund to truly neutral levels should not be unexpected.

Other technology funds that traders should keep an eye on over the next few days include the Semiconductor HOLDRS ETF (SMH), which focuses on the semiconductor side of the technology sector, as well as the Direxion Technology Bull 3x Shares (TYH). TYH is a leveraged fund that tracks the daily performance of the Russell 1000 Technology Index on a three-to-one basis. Shares of TYH finished lower by nearly 2% on Tuesday.

The stocks and ETFs in today’s report were drawn from the data and research available through The Machine. To find out more, click here.

David Penn is Editor in Chief of