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Three Tech Stocks With the Technical Muscle to Profit in an Extended Market Up Move

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All appear to be in the emerging phase of longer-term price moves and thus stand a good chance of leading the way if the current market rally extends to year end.

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Editor's Note: This article was written by Gil Morales and Dr. Chris Kacher. Morales and Kacher are both Managing Directors of MoKa Investors, LLC, cofounders of www.selfishinvesting.com, and co-authors of the new book, "Trade Like an O'Neil Disciple: How We Made 18,000% in the Stock Market" (Wiley, August, 2010).


In spite of their reputation as "scary" months, September and October saw a major market advance, with prices defying late-August fundamentals that supposedly didn't "justify a bull market." To be precise, the Nasdaq Composite and the S&P 500 showed respective gains of 17.6% and 13.2% through mid-October.

As a result, many investors feel the market has come "too far, too fast" and now offers a poor risk/reward scenario -- one that argues against jumping in at this "late stage" in the rally.

We disagree. Our proprietary MoKa Market Direction model remains on a buy signal and, given the strong rebound from the market's Oct. 19 dip, there's no reason to conclude the rally has ended (though a mild correction or brief period of consolidation always remains a possibility).

The key, if you're just getting in now, is to focus on fundamentally sound stocks with charts that also showed strong technical price and volume patterns during the recent run-up. These stocks will most likely be the leaders if the market rally continues into year-end.

That's because such vigorous price/volume movement coming out of a prior consolidation period is a clear indicator of the market's "state of mind" -- the sum total of buy and sell decisions made by millions of investors. When investors -- particularly "big money" institutional investors -- vote with their dollars in favor of a stock moving from consolidation to new or higher highs, it often sets a foundation for further upside price movement, whether that takes place immediately or as part of a longer-term trend lasting a few weeks or months.

Three technology issues with just this kind of technical muscle -- stocks that still appear to be in the emerging phase of longer-term price moves and thus stand a good chance of leading the way if the current market rally extends to year-end -- are:

1. Google (GOOG), recent price: $613.30 -- Google IS the Internet, and its dominant role in the search field favorably positions it to capitalize on a number of Web-related trends, including digital on demand and cloud computing. The company recently announced positive earnings and the stock gapped higher on tremendous upside volume. The chart below clearly shows that rise in volume and the related sharp breakout from a long-term consolidation.

Repeated studies have shown that market leaders often take leadership roles for two or three market cycles. Google led the market in the bullish 2004-2007 cycle, then went into a prolonged three-year consolidation. However, the "cup-with-handle" formation in the chart indicates Google could be emerging from that consolidation, ready to once again assume a leadership role in any continuation of the recent up move.

If Google's pattern is valid, the stock should easily hold above the $575 level, with the heavy buying volume acting as "rocket fuel" for a further advance. This volume surge isn't the result of some loose consortium of grandmothers buying Google in two-share lots; this is big institutional buying -- and, once it starts, it typically doesn't end any time soon.


Google, Inc. is emerging from a long-term consolidation extending back to late 2007.

2. Oracle
(ORCL), recent price: $29.10 -- Software giant Oracle is the granddaddy of cloud computing, the latest and most exciting wave combining hardware and software aspects of the Internet. Oracle CEO Larry Ellison first came up with the "network computer," or "NC," in the 1990s. This device, which it built with Sun Microsystems, was intended to function as a "dumb terminal," accessing all its content, files, and applications off the Internet. Low bandwidth capabilities made this too difficult to implement then, but the advent of high-speed Internet service has now moved this concept to the forefront under a new moniker: "cloud computing."

Clearly, the field is now tilted strongly toward Oracle's strengths, and the shares should benefit from institutional money shifting out of other hot, but much smaller cloud-computing stocks into a more stable, larger-cap issue.

The chart below shows two huge-volume gap-ups as Oracle comes up the right side of a "cup" consolidation that began forming in late April during the overall market's correction. As with Google, the heavy buying represents "fuel" for potentially higher prices. Equally bullish is the fact that the stock didn't surrender much of its gain after the two big-volume gap-ups, instead moving to a new 52-week high in a very tight "flag" formation. More recently, the stock has emerged from this flag formation on technical buy points called "pocket pivots."


Oracle Corp. holds its gains, then marches higher.

3. Rovi (ROVI), recent price: $50.25 -- Silicon Valley-based Rovi Corp. recently signed a licensing agreement to supply technology juggernaut Apple (AAPL) with its Interactive Program Guide (IPG) service, which allows users to search for and quickly and easily access online content such as movies, videos, and music. This pact follows a similar deal with Comcast (CMCSA) and opens up the possibility of future deals with Google and other large Web-content providers/enablers. Rovi is already sporting a three-year earnings growth rate of 41%, and these new deals will have a strong impact on revenues going forward.

Technically, Rovi has some very favorable characteristics that back up the fundamental story. The chart below shows that Rovi recently emerged from a big "stair-step" pattern, which is simply one consolidation, or "base," on top of another. This is a particularly favorable pattern, especially if it forms during a market correction as this one did beginning in April 2010.

When the market began to move higher in early September, Rovi responded by first selling off below its 50-day moving average in a "shakeout" that ousted so-called "weak hands" in the stock. The subsequent gap-up on large volume represented an ensuing move into the stock by "strong hands" -- most likely institutional buyers -- driving Rovi quickly above the $50 price level, where it has held. The company will announce earnings on Nov. 5, which could provide a catalyst for the stock's next move higher.


Rovi emerges from a "base-on-base" formation with a huge-volume gap-up move following a shakeout that helped "clear the decks" of weak hands in the stock.

Some view technical analysis as "voodoo," but the prudent use of charts to identify accumulation by large, aggressive buyers can be extremely helpful when combined with a careful review of fundamentals. Strong surges in a stock's price and volume (so-called technical "action") are usually a confirmation of improving fundamentals -- e.g., strong earnings and sales-growth rates, increasing profitability, and dynamic new developments -- and a harbinger of potentially stronger stock prices down the pike.

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Position in ROVI.

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