3 Chart Patterns That Suggest It's Time to Trade Technology Stocks

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By CASEY MURPHY
Updated Jun 25, 2019
The recent decline in Facebook, Inc. (FB) shares and the better-than-expected
earnings from Amazon.com, Inc. (AMZN) have put the technology sector into the
spotlight over the past several trading sessions. In this article, we'll take a
look at what the charts of technology-focused exchange-traded funds (ETFs) are
saying and try to determine how traders will look to position themselves over the
days and weeks ahead. (For a quick refresher, see: Analyzing Chart Patterns.)

Technology Select Sector SPDR Fund

One of the most popular exchange-traded products that is used by retail investors
for tracking the performance of technology companies is the Technology Select
Sector SPDR Fund (XLK). Fundamentally, the ETF comprises 75 holdings and has a
market value of more than $20 billion. Taking a look at the chart below, you can
see that the price is trading within a defined range, which has helped set entry
and exit prices for most traders for much of 2018. Traders will keep an eye on the
converging trendlines because a break above the resistance would likely act as
catalyst of a sharp move higher. Conversely, a close below the support near $71
would be used as a sign of a reversal and would likely lead to a major correction.
As earnings season continues, the dotted trendlines will undoubtedly continue to
play a significant role in the placement of orders. (For further reading, see: 3
Charts That Are Warning of a Pullback in Technology.)

Technical chart showing the performance of the Technology Select Sector SPDR Fund
(XLK)
[If you'd like to learn more about drawing trendlines as well as pinpointing
support and resistance levels, check out the Technical Analysis course on the
Investopedia Academy, which includes videos and interactive content to help you
improve your trading skills.]

Social Media
The social media sector has been a darling of the financial markets since the start
of the uptrend in early 2017. Taking a look at the chart of the Global X Social
Media Index ETF (SOCL), you can see that a triangle pattern has formed on the chart
near the long-term support of the 200-day moving average. This chart is of specific
interest to traders because the proximity of major support creates a lucrative
risk/reward scenario and could lead to a sharp move depending on the direction of
the breakout. If Facebook's recent decline is a leading indicator, one may expect
the market to hold a downside bias and watch for a move below $34.71. (For further
reading, see: What Technical Tools Can I Use to Measure Momentum?)

Technical chart showing the performance of the Global X Social Media Index ETF
(SOCL)
Semiconductors
Semiconductors are another segment of the technology sector that active traders
will want to pay close attention to. Like the pattern shown on the chart of SOCL
above, the VanEck Vectors Semiconductor ETF (SMH) is showing a defined triangle
pattern near the major support of the 200-day moving average, creating one of the
best risk/reward setups in the market. A close beyond either of the trenldines will
be what traders use to confirm the momentum, and many may wait on the sidelines for
this move in hopes of increasing the odds of making a profit. (For related reading,
see: Analyzing Chart Patterns: Triangles.)

Technical chart showing the performance of the VanEck Vectors Semiconductor ETF
(SMH)
The Bottom Line
The technology sector has been trading within one of the strongest uptrends in the
market since 2017. The increased visibility of major tech companies due to volatile
earnings suggests that the patterns highlighted above will invaluable over the
coming days or weeks. (For more, see: The Utility of Trendlines.)

Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not
own a position in any of the securities mentioned.

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