It is helpful for traders to remember that only one of the top 10 holdings in Technology Select Sector SPDR ETF (XLK) is a semiconductor stock -- Intel Corporation (INTC).
On a day when semiconductor stocks, as measured by the Semiconductor HOLDRS ETF (SMH), finished off their highs but up more than half a percent on the session and closer to short-term overbought, than short-term oversold, this may be a distinction that is much, if not all, of the difference in the performance between the broader technology sector and the semiconductor subgroup.
From the point of view of the trader, this means that there is a strong chance of upside in the near term in XLK ,and that it is possible that the semiconductor stocks might even underperform relative to such a move.
Heading into trading on Monday, the XLK has closed lower for five days in a row, the last four in oversold territory above the 200-day moving average. By contrast, the SMH has actually edged higher over the past two sessions, leaving oversold territory and, as I mentioned above, likely to wind up in overbought territory on any significant follow-through buying on Monday.
One problem is that XLK is trading below its 200-day moving average, which will put the fund off-limits for many traders. A solution to this is to trade a leveraged version of the technology sector exchange-traded fund (ETF), insofar as the price behavior of leveraged funds is not bound by the 200-day in the way it is for non-leveraged ETFs -- at least, not in our research.
In part this is because leveraged ETFs like the Direxion Technology Bull 3x Shares ETF (TYH) and even the ProShares Ultra Technology ETF (REM) need to reach truly extreme levels before they earn the sort of "consider buying" ratings that will put these ETFs on the watchlists of short-term traders and active investors. For example, TYH has five out of 10 "neutral ratings" ahead of Monday's open after dipping to near oversold
territory on Thursday. TYH bounced a little more than half a percent in Friday's session.
Remember, when trading leveraged ETFs, be sure to reduce your position size accordingly. In other words, if you are trading a 2x ETF, cut your regular trading size in half. If you are trading a 3x ETF, then use a third of your regular trading volume. This will help prevent you from taking on a larger position than you might have intended due to the built-in leverage of 2x and 3x funds.
The ETFs in today's report were drawn from the data and research available through PowerRatings. To find out more, click
David Penn is Editor in Chief of TradingMarkets.com
Disclaimer: The views represented in this column are those of the individual authors only, and do not necessarily represent the views of Schaeffer's Investment Research.
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