This Sector Could Reward Traders With Double-Digit Gains

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A deal on the fiscal cliff -- at least the tax part -- caused the "risk on" trade to go into hyper-drive on Jan. 2. The first trading session of the year saw nearly every major average, and most sectors, soar between 2% and 3% on average. This relief rally over the certainty on tax policy wasn't lost on the technology sector, as the Technology Select SectorSPDR ( XLK ) surged 3.33% in the first session of 2013.

For the technologyETF , the gains are a welcome respite from the mostly downbeat trade that's taken place since September. In fact, from the most recent high in September through the end of 2012, XLK was hit with a loss of nearly 9%.

Thanks to an early 2012 run higher in theshares , technology seemed like it would be the place to be for most of the year. Then we started to see the sector falter.

So, why was the September selling in the tech ETF so sharp? The one big answer is Apple (Nasdaq: AAPL) .

Shares of the personal technology giant really hit the skids in September, falling from an all-time high of just north of $700 to just over $500 in December. The 52-week chart here of Apple clearly shows the September wane. In fact, the plight of the cultishbellwether nearly mimics that of XLK, with a big run higher to start out 2012, followed by a final quarter falloff.

Like XLK, Apple also saw a big buying spike in Wednesday trade, asmoney came back into thestock in search of its former glory.

Now, it should come as no surprise that Apple has a major effect on XLK. The stock makes up nearly 20% of this ETF's holdings, and is by far the single-largest holding in thefund . So, in a way, as Apple goes, so goes XLK.

However, what I like about XLK is that it holds 77 other technologystocks , many of which have seen a big surge over the past several years. Top holdings in XLK include Microsoft (Nasdaq: MSFT) , IBM ( IBM ) , AT&T ( T ) and Google (Nasdaq: GOOG) , which, in order, round out the top five positions in the fund.

If you own XLK, and if Apple is on, you are likely also going to have alot of satellite techs respond well with money flowing into the sector. The downside, of course, is that when Apple sells off, it's hard for XLK to maintain abullish disposition .

Thebottom line here for traders is that both XLK and Apple have, in my view, experienced a bit too much selling in Q4. That makes them good candidates for a newwave of risk-on buying in each -- and that is a trend traders can exploit over the next six weeks.

Action to Take --> Buy XLK at themarket . Set stop-loss at $27.44. Set initialprice target at $32.81 for a potential 11% gain in six weeks.

This article originally appeared on ProfitableTrading.com:
This Sector Could Reward Traders With Double-Digit Gains in 6 Weeks



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.

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This article appears in: Investing , ETFs

Referenced Stocks: AAPL , IBM , MSFT , T , XLK

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