Are Social Media Stocks About To Break Out?

The internet stocks have been exploding higher this month. I first mentioned the breakout in the Dow Jones Internet Index a few weeks ago and these guys just keep on ripping. It's nice to see this group leading the way in technology as the Nasdaq Composite gets set to close on Friday at the highest monthly closing price in history. But today I want to turn out attention to the Social Media space.

The Global X Social Media Index ETF $SOCL is designed to track the performance of the Solactive Social Networks Index (SONIX). This index tracks the price movements of 15 components and are weighted by market capitalization. Tencent Holdings, Facebook, Twitter and Linkedin are some of their top holdings. This is mostly a different group of names than the DJ Internet Index mentioned above, whose top holdings include Google, Amazon, Facebook, Ebay and Priceline.

Here is a daily candlestick chart showing the Social Media Sector breaking out above a clean downtrend line from the highs in September. I look at a lot of charts, as you guys know, and I see a lot of names that temporarily peaked right around this time. So the ensuing correction over the past 5 months, in my opinion, has been constructive bigger picture, as it has been in other stocks and sectors as well.

Not only are we taking out this downtrend line, but the consolidation since the initial breakout looks bullish to me. Notice the flat overhead supply and series of higher lows in what some technicians might call an ascending triangle. These tend to be continuation in nature and suggest higher prices are coming upon an upside resolution.

Here is another look. This is a daily bar chart showing this same ETF, but this time without the trendlines and instead a 200 day simple moving average. Notice how this smoothing mechanism is upward sloping, yet prices are trending below it. To me, this is one of the more bullish setups across markets. We don't see this very often, so when we find them I think we should pay attention:

Risk management-wise, we only want to be in this space as long as prices are above the overhead supply from throughout the month of February. Below that and I see no reason to be involved. Price targets are substantially higher than current levels. I think we get back up to last year's highs, at least. This represents over 20% of upside while also giving us a very well-defined level of risk, which to me is what really matters.

I like it.

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Tags: $SOCL $FDN $COMPQ $FB $TWTR $LNKD