Securities Research Services

Monday, January 15, 2007

Tech Set Up Interesting Here

The week closed strong last week but now the market, and in particular, the tech sector, is overbought. Of course overbought conditions can remain for quite some time in a strong bull market, so it doesn't necessarily mean we have to pull back here. Even so, take a look at where the QQQQ is at on its weekly chart.
As you can see, it has channel resistance at $46. This channel has repelled the QQQQ three times in the last four years. There are good reasons to believe that this time will be different, but we need to be wary of this $45.50-$46.00 area and give it respect.

As we said, there are some good reasons to think that this time might be different. The bearish case is obvious (resistance and overbought market conditions), so we will focus primarily on the bullish case here.

1. The QQQQ is trading in a "bump-and-run" pattern after it fooled traders on a false breakdown last July. This dip below support is a classic shake out pattern that often occurs before major bull markets begin.
2. The QQQQ seems to be carving out a cup and handle pattern. This is also a technically bullish development.
3. Major QQQQ components are very strong: MSFT broke out above a similar channel a couple of months ago and is now on a tear as institutional money floods in. Likewise, unless you have been on vacation in Siberia, you know that Apple (AAPL) has been breaking out as the market excitedly embraces the iPhone.

Money has been moving out of energy and into tech for over a week now and the movement has been quite dramatic. This is setting up to be the year of the tech. Could it be a fake out? Yes, definitely. We need to be wary of that and until the QQQQ breaks through resistance we need to be extra careful. So far it looks really good for the techies though.

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