Trading Nation

Don't get caught in this 'bear trap,' says expert

We prefer software stocks over semiconductors, says Strategic Wealth Partners CEO

Tech's turmoil could be temporary, says one technical analyst.

Every time the tech-heavy Nasdaq 100 has sold off by more than 2% this year — which has now happened seven times, including on Tuesday — it has clawed its way to new highs, Frank Cappelleri, chief market technician at Instinet, told CNBC's "Trading Nation" on Tuesday.

Citing a chart that mapped out the Nasdaq 100's declines in 2019, the worst being a 4.1% drop and the least damaging being a 3% move lower, Cappelleri pointed out that each time, the weakness has turned out to be a "bear trap."

"Each one of those pullbacks eventually reversed," the technician said. "And the most important part about that is that those pullbacks produced what we call a bear trap, where there is a bearish pattern formed, [then a] downside break, then a quick reversal higher. Each one of those reversals higher has produced a new ... high."

This pattern is especially important for investors to consider on days like Tuesday, when the Dow Jones Industrial Average shed nearly 650 points in intraday trading on worries around U.S.-China trade talks, Cappelleri said.

"You know [the tech stocks are] going to bounce relatively soon," he said. "If that bounce does not produce a high here, that'll tell us that the character has changed. At that point, we'll probably get more bearish."

Mark Tepper, president and CEO of Strategic Wealth Partners, said investors might want to review their options before going all in on the tech sector.

"I wouldn't jump the gun here," he said in the same "Trading Nation" interview, adding that after a 20% rally for Nasdaq 100 this year, "A breather's OK. It's healthy."

Tepper chalked up Tuesday's selling to investors reducing risk in response to President Donald Trump's threats to raise tariffs on Chinese goods, but he said the pullback didn't make him particularly bearish.

"We continue to like tech. We're overweight, but we would be selective," he said. "So, we prefer software over semis right now. Software's going to be less cyclical, and one of our favorites is Salesforce."

Tepper said he favored the cloud computing giant for its "focus on making businesses more profitable and more efficient," particularly when it comes to building recurring revenue streams.

"So, as long as the Fed is patient [and] the bull market stays intact, I'd be adding to positions right now" in tech, Tepper told CNBC.

The Nasdaq 100 closed 2% lower on Tuesday after a brutal day for the broader market. The Technology Select Sector SPDR Fund, which tracks technology stocks, also shed about 2%.

Disclosure: Tepper's Strategic Wealth Partners owns shares of