2016 has been a great year so far for tech sector investors. Here are five stocks that could make it even greater.
2016 has been a great year so far for tech sector investors. As I write, the Technology Sector SPDR ETF (XLK) is up 12% on a total returns basis year to date, vs. about an 8% total gain from the rest of the S&P 500.
In other words, simply betting on the tech sector has held the key to 50% better performance than what the S&P has been paying out year-to-date. And the trend in tech stocks isn't showing any signs of slowing down as we head into the fall months. In fact, select stocks within the tech sector are on the verge of breakout territory this month.
To figure out which tech stocks are in play here, we're turning to the charts for a technical look at five big stocks to buy for gains.
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.
ServiceNow
Leading off the list is $13 billion cloud software stock ServiceNow (NOW) . At a glance, it doesn't look like ServiceNow has been very productive in 2016. Year-to-date, shares are actually down a little over 10%. But that stat misses a bigger trend that's transpiring in ServiceNow; shares are actually up almost 60% since they bottomed back in February. And now ServiceNow is testing a big breakout level at $77.50.
ServiceNow has spent the last few months forming an ascending triangle pattern, a bullish continuation setup that's formed by horizontal resistance up above shares at the aforementioned $77.50 level and uptrending support to the downside. Basically, as ServiceNow bounces in between those technically important price levels, it's been getting squeezed closer and closer to a meaningful breakout above that $77.50 price ceiling. Shares ended slightly above that level with yesterday's close; we'll want to see confirmation today to signal a buy.
One important side indicator on ServiceNow's chart is relative strength. This stock's relative strength line measures ServiceNow's price performance versus the rest of the stock market. NOW's relative strength gauge is holding onto an uptrend from its February lows, an indication that this stock's outperformance is still happening. As long as that uptrend stays intact, expect ServiceNow to keep on beating the S&P.
Nvidia
We're seeing the exact same setup in shares of graphics chip giant Nvidia (NVDA) right now. Like ServiceNow, Nvidia is forming a textbook ascending triangle pattern. Unlike the chart we just saw though, Nvidia's price setup is shorter-term in nature. For traders looking to buy the breakout in Nvidia, the price level to watch is resistance up at $63.50.
Why all of that significance at the $63.50 level? It all comes down to buyers and sellers. Price patterns, such as this ascending triangle setup in Nvidia, 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 Nvidia's shares themselves.
The $63.50 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 $63.50 so significant -- the move means that buyers are finally strong enough to absorb all of the excess supply above that price level.
Shares are within a few cents of triggering a buy as of this writing; keep a close eye on how Nvidia trades this week.
Infosys
2016 has been a do-nothing year for shares of Infosys (INFY) . Since the start of the year, this $36 billion technology consulting stock is down about 2% -- and that's a best-case scenario. In fact, shares have been in trouble more recently, selling off almost 17% of their market value in the last three months. The good news is that Infosys is finally beginning to look "bottomy" as the calendar flips to the fall. Here's how to trade it.
Infosys is currently forming a rounding bottom pattern, a bullish reversal setup that looks just like it sounds. The rounding bottom in Infosys indicates a gradual shift in control of shares from sellers to buyers. It triggers with a breakout through the resistance level that's acted like a ceiling for shares since the pattern started forming. For Infosys, the big price level to watch is $16.50, another breakout price that shares are flirting with this week.
Like with any of the trades on our list of tech breakouts, it's critical to be reactionary if you're waiting for a buying opportunity in shares of Infosys. Technical analysis is a risk-management tool, not a crystal ball, and INFY doesn't become a high-probability trade until buyers can muster the strength to materially push shares above $16.50. The good news is that investors won't need to exercise a whole lot of patience here; shares are positioned to test that $16.50 level today.
CA
Good news: You don't need to be an expert trader to figure out what's happening in shares of $14 billion tech firm CA (CA) . Instead, the price action in this big software stock is about as straightforward as it gets. CA has been bouncing its way higher in a well-defined uptrend for all of 2016, and as shares touch the bottom of their price channel for a fifth time here, we're coming up on a buying opportunity.
The price channel in CA is formed by a pair of parallel trend lines that have contained effectively all of this stock's price action going all the way back to its lows in January. Every time CA's share price has tested trend line support, the subsequent bounce has provided an optimal entry from a risk/reward standpoint. And now, as shares touch that support level again in September, it makes sense to buy the next bounce higher.
Actually waiting for a bounce from here 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 a bounce to happen first, you're ensuring CA can actually still catch a bid along that line before you put your money on shares.
KLA-Tencor
Last on our list of bullish tech sector trades is $11 billion semiconductor equipment stock KLA-Tencor (KLAC) . KLA-Tencor's price action has been looking choppy lately, most recently following news that the firm's planned acquisition by Lam Research (LRCX) was being held up by regulatory approvals. Originally, the cash and stock merger was expected to be completed by this June.
But while investors wait to see how things pan out, there's a trading setup showing up in KLA-Tencor's chart. KLA-Tencor is currently forming a short-term inverse head and shoulders pattern, a bullish price 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 comes on a move through KLA-Tencor's neckline at $71.
Don't think that KLA-Tencor isn't a valid trading opportunity just because this stock is slated to be acquired. Shares currently trade for a 12% discount to their deal value, and more than half of KLA-Tencor's acquisition price is paid for in Lam Research shares, which also trade on the Nasdaq. That's good reason to pay attention to KLAC's price chart as shares test their $71 neckline level this week.
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