Why Earnings are Key for the Tech ETF XLK – ETF News And Commentary

As the fourth quarter earnings season gains mileage, the broader markets seems to be poised for a strong surge. This is especially true considering the positive economic developments that have taken shape of late and the surprisingly solid earnings picture put up by corporate America thus far.

The technology sector will be in focus this week as giants like Apple Inc (AAPL), International Business Machines (IBM), and Microsoft (MSFT) are all set to announce their quarterly results. The sector has been facing tough times of late with the overall business spending, while consumption for I.T. firms have witnessed a strong decline as well (see Strong Auto Sales: Good News for Metal ETFs?).

This has surely made a dent in investors’ confidence in respect of this sector. As a result, the once reigning tech sector which was leading the broad market rally is actually trailing it by a rather wide margin.

Given this situation, it is imperative for the Tech bellwethers to put up a good show this week to revive the sector. The following one year price chart analysis of the Technology Select Sector SPDR ETF (XLK) exhibits mixed results.

The ETF managed to reach its 52 week high of $31.74 last year in September. It was a time when the Technology sector was leading the broad based market rally. However, since then, the ETF has shown signs of weakness.

Also, the recovery post the election sell-off in mid November has been quite disappointing and finally it seems the ETF has entered a choppy trading period (read Diamond ETF: An Investor's Best Friend in 2013?).

Earlier in 2012, the ETF had faced similar headwinds when it remained directionless (with a flavor of bearishness) for a decent period of time (indicated by the bigger rectangle). During that time the Parabolic Stop and Reversal (SAR) did not make much sense either in terms of direction of the technology ETF.

However, then came the second quarter earnings season which was fairly positive for the tech sector as a whole. This acted as a catalyst for an uptrend for the ETF and its prices soared.

Currently we again find ourselves in a similar situation without an indication of a clear cut direction as confirmed by the Parabolic SAR which indicates choppiness (indicated by the smaller rectangle).