These charts will tell you if a tech rally is ahead
Not only is this the
traditional time for the whole market to rally, but, specifically, this is also
the traditional time for tech names (the NASDAQ) to outperform. I
must admit, I have not been paying much attention to tech names as of late
because of their generally lackluster performance, but, I have heard other
analysts recommending them so I thought I would asses the validity of the
recommendations.
So far for the fourth quarter, the S&P 500 has a
return of 0.48%, while the NASDAQ Composite has a return of 2.36%. The numbers
unequivocally show short-term outperformance. How long can it continue? To
analyze the possibility of a strong (longer-term) out performance by tech, let’s
look at the charts of the NASDAQ 100 Trust Shares
(
QQQQ |
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PowerRating), the Philadelphia
Exchange Semiconductor Sector
(
SOX |
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PowerRating), and, also the Bullish Percent Index of
the NASDAQ Composite. It will also be helpful to see how they are performing
relatively versus the S&P 500 Index on a ratio basis.
When using the traditional point and figure box
size of 1 point, the Qs haven’t had much movement at all as of late. Currently,
they have rallied to a point of resistance. The last time they were at this
point was in December of 2004. There is still significant overhead resistance on
this chart from the excesses of the tech bubble. I would not recommend a buy on
QQQQ unless it can go to $41.00 and break through the current resistance. When
compared to the S&P 500 on a relative basis, the QQQQ has shown some improvement
in the short run. However, without the breakout in price, I would wait for new
purchases. To be fair, the largest holding in the QQQQ is Microsoft
(
MSFT |
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PowerRating)
and we all know what a less than stellar performance that stock has had as of
late. Probably not by coincidence, MSFT is also at a point of significant
resistance.
Let’s look at semiconductors. They are often a
popular place to invest within the technology sector. The Philadelphia Exchange
Semiconductor Index, looks pretty good here for new buys on a price basis
(purchase of calls on the index or perhaps
(
IGW |
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PowerRating)). Like the QQQQ, there has
not been much volatility in the index as indicative by the small amount of
movement shown on the 20 point chart. It, too, has significant overhead
resistance. The first point of resistance will be at the 480 level. On a
relative basis, it actually is underperforming based on its relative strength
chart versus the S&P 500 Index short and long term (small and larger box size).
Finally, an analysis of the Bullish Percent Chart
of the NASDAQ Composite reveals that it, like the Bullish Percent Chart of the
New York Stock Exchange, is still in Os (a negative trend). While some of the
shorter term breadth indicators have reversed to Xs (a positive trend), the
longer term and main indicator that I use for technology names, is still in Os.
So, as of now, I am not extremely bullish on technology, not only because of the
state of this indicator, but also because of the charts of the SOX and the QQQQ.
There may be some specific names within tech that will have a great quarter, but
I doubt if the SOX itself will significantly outperform when compared to other
sectors (such as Biotech
(
BTK |
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PowerRating) and Broker Dealers
(
XBD |
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PowerRating)). Unless the
QQQQ can break to $41.00, it will likely continue chugging along at an
unimpressive pace.
Sara Conway
Sara Conway is a
registered representative at a well-known national firm. Her duties
involve managing money for affluent individuals on a discretionary basis.
Currently, she manages about $150 million using various tools of technical
analysis. Mrs. Conway is pursuing her Chartered Market Technician (CMT)
designation and is in the final leg of that pursuit. She uses the Point and
Figure Method as the basis for most of her investment and trading decisions, and
invests based on mostly intermediate and long-term trends. Mrs. Conway
graduated magna cum laude from East Carolina University with a BSBA in finance.