Is the Internet Sector About to Breakout?

When I look at different sectors and industries one of first places I turn to is the seasonal strength studies published in the Stock Trader’s Almanac. Jeff Hirsch does a great job crunching the numbers looking for periods of time that certain sectors have seen strength. For the Internet sector, that period of time has historically started in August and lasted through December.  So does price action confirm this bullish seasonal bias?

Below is the daily chart for the First Trust Dow Jones Internet ETF ($FDN). It’s had some big moves this year as it rose 11% from January until March and then dropped 26% before finding a bottom in May and most recently it has gained 16% from that May low – all while the S&P 500 has been up just 5%. This is a great example that just because the major indices may be up a couple of percent or even in the red it doesn’t mean other pieces of the market can’t have big moves.

Heading into the low in May for $FDN we can see that a positive divergence developed in the Relative Strength Index (RSI). As price made lower lows we saw this momentum indicator begin to create higher lows, a sign that price may be getting ready to start heading higher. And that’s exactly what happened.

The Internet ETF is now in a symmetrical triangle pattern as it consolidates. This type of pattern often precedes a continuation of the prior trend, which in this case would be bullish. When we look at the movement in momentum, the RSI has held support just under its midway point, which is a positive sign that $FDN may be coiling to head higher.

Looking at the bottom panel of the chart we have the relative performance of $FDN vs. the S&P 500. Since the May low, the Internet sector has been outperforming the market, with the ratio between $FDN and $SPX in an established up trend. This has remained the case even as $FDN has consolidated over the last month.

Going forward, I’ll be watching to see if price can take out the upper trend line and then break past the prior high around $61. I also want to see if the Relative Strength Index can break above its prior high at 60 as a sign that momentum is confirming the potential bullish move in price.


Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.

About Andrew Thrasher, CMT

Andrew Thrasher, CMT is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.