Using our proprietary point-and-figure-based charting system, I review a couple thousand charts per week in an attempt to identify interesting buy or sale candidates. I am never satisfied with sector or industry-level narratives because underneath the surface, there is always more than one narrative going on within a sector.
Currently, I identify four dominant trends in the US information technology sector:
- Major Trend Downside Reversal
- Major Trend Upside Reversal
- Upside Breakout
- Long-term Uptrends
Before I tackle the first, let me briefly explain our charting system. The charts below show a derivative of a basic point-and-figure-methodology, except instead of the traditional boxes based on points, we make each box a constant 2.5%, and retain the three-box reversal technique. Since each box is a 2.5% absolute move, each reversal is a 7.5% (2.5% x 3). For those new to this charting discipline, the unique aspect of point-and-figure charts is that time is not the x-axis. Instead, the x-axis measures “risk” in the sense that it measures reversals from an uptrend or downtrend.
Starting with the Major Trend Downside Reversal, this formation has two characteristics: 1) the stock broke the 45-degree uptrend line, and 2) the stock is below the current 45-degree downtrend line. Some examples follow, and just so it is clear, these are not attractive candidates.
The Major Trend Uptrend Reversal pattern has a couple characteristics: 1) it has broken the 45-degree downtrend line, and 2) it is above the 45-degree uptrend line. This is a much more attractive group of stocks as they are demonstrating an actual long-term trend change from a downtrend to an uptrend.
The next group is the Upside Breakout group of stocks. The main characteristic here is that the stock is making a new high, mostly after a consolidation period. This is the most attractive chart formation in the technology sector in our work and could be the short list of stocks to consider on the long side.
There are only a few stocks that we can find that fall into the Long-term Uptrend category. Here, the only criteria is that the stock has held for the last five years above the 45-degree uptrend line. This is also an attractive group of stocks, but one has to be vigilant—given the wider sector trends—for a brewing reversal of the Long-Term Uptrend.
Investors need to be especially choosy in the US technology sector as there are many more stocks that are in Major Trend Downside Reversals than in the Major Trend Upside Reversal, Long-Term Uptrends or Upside Breakout groups. The momentum investor might consider the Upside Breakout group. The value investor might study the Major Trend Upside Reversal group since a falling stock generally gets cheaper as it falls (unless of course earnings have fallen faster than price). The growth investor might want to look at the group in Long-Term Uptrends. Investors playing on the short side might consider our first group, the Major Trend Downside Reversal.
As of 6/30/22, Open Text, Synopsis, On Semiconductor, Amphenol, Broadcom and Paychex were held in the Knowledge Leaders Strategy and the rest were not.
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