The technology sector triggers several bullish alerts

Key points:

• The equal-weighted S&P 500 Technology sector triggered a deviation from trend buy signal
•  After similar reversals, an equal-weighted Technology index was higher a year later 79% of the time
• The S&P 500 Technology sector closed above its 10-day moving average for 21 consecutive days
• After similar trend reversals, the group was higher six months later, 75% of the time

A moving average ratio reversal signal for the Technology sector

For the first time in more than two years, the equal-weighted Technology sector registered a deviation from trend buy signal. The indicator measures the 4-week moving average for the index relative to the 40-week average. An alert occurs when the ratio between the two averages rises above 1.04 after a reset below 0.93.

Similar moving average ratio reversals preceded a bullish outlook for the sector

When the ratio between the short and medium-term moving average for the equal-weighted Technology sector increases above 1.04 after a reset below 0.93, Technology stocks performed well across most time frames, with a solid risk/reward profile. 

Technology typically outperforms in the early stages of a new cyclical advance. So, the new signal is a welcome development as it has occurred after most bear market lows, with only one unfortunate whipsaw alert in 1973.

A short-term moving average trend signal

After closing below its 10-day moving average for more than 12 consecutive days, the cap-weighted S&P 500 Technology reversed higher and registered 21 consecutive sessions above the average, triggering a buy signal for the sector. 

The premise behind the signal is the following. When markets are bottoming, volatility is high, and indexes rarely close above a short-term moving average for too long. However, when an index emerges from the bottom, it will likely sustain itself above the average for an extended period.

Similar short-term trend reversals preceded positive results  

When the cap-weighted Technology sector closes above its 10-day moving average for 21 consecutive days after closing below the average for at least 12 sessions, it performed well a year later. Since 1979, the signal has shown a profit in every case at some point in the next six months. Similar to the deviation signal, the only whipsaw alert occurred n 1973.

The concept can be used for individual stocks

Tesla triggered a signal for only the third time in its brief history.

What the research tells us...

After a challenging 2022, I'm finding more opportunities in the Technology sector, especially when compared to value sectors. With a deviation from trend and a 10-day moving average trend reversal signal triggering an alert, the outlook for the Technology sector is more encouraging. Except for 1973, historical cases have typically foreshadowed an end to significant drawdowns.