3 Ways to Trade Cybersecurity in 2018

Looking back on 2017, it is apparent that the need for enhanced cybersecurity is growing and that the industry is ripe for innovative solutions. The persistent barrage of news stories of hacked accounts and servers, stolen personal information, ransom for stolen files, and the increasing number of threats from overseas underscore a solid case for investment. As you'll read in this article, several charts confirm the thesis that now could be an ideal time to buy. (For related reading, check out: 13 Ways to Invest in Cybersecurity.)

With the rise in popularity of exchange-traded products, it is now possible for retail investors to gain exposure to nearly every niche market segment. In the case of cybersecurity, the fund of choice is the ETFMG Prime Cyber Security ETF. The fund comprises 45 holdings and has net assets of approximately $1.2 billion. With an expense ratio of 0.60%, it could be a cost-effective solution for those who don't want to conduct their own research and would rather have exposure to a diverse basket of companies.

Taking a look at the weekly chart below, you'll see that the price recently broke beyond the resistance of a channel pattern. This common technical pattern is used by traders to identify periods of consolidation within defined trends and predict when to expect the trend to continue based on the movement beyond one of the trendlines. The recent breakout, shown by the blue circle, suggests that the bulls are in control of the momentum and that the price is likely poised for a move higher over the weeks and months ahead. The recent retracement toward the upper trendline will likely be used as a buying opportunity since it offers long-term traders a more lucrative risk-to-reward ratio. (For more on this topic, check out: 2 Cybersecurity ETFs to Consider.)

Founded in 2003, Splunk is a relative newcomer to the security scene, but it is no stranger to innovative solutions spanning nearly every industry in topics such as security monitoring, advanced threat detection, forensics and incident response. In its recently published 2017 Magic Quadrant for Security Information and Event Management, Gartner, Inc. (IT) named Splunk first in the security information and event management market.

Taking a look at the chart, you'll see that the bulls have been in clear control of the momentum since the price broke out of a confined trading range back in November. Active traders will likely use this breakout as a sign that the long-term uptrend is just getting started. Depending on investment horizon, some traders may want to wait a few more weeks to see if the overbought reading on the relative strength index (RSI) will trigger a retracement toward the support near $70 before opening a position. A slight pullback would be ideal because it would offer a more lucrative risk/reward for those who missed the recent breakout. On the other hand, long-term traders may not want to time their entry and just open a long position at current levels and then protect it by placing a stop-loss order below the swing low near $80. The strategy to trade the move higher will really come down to each individual trader's tolerance for risk and their holding period. (For more on this topic, check out: Why Is Cybersecurity So Important for Investors and Advisors?)

One of the top holdings of the HACK ETF that could be worth a closer look for those interested in picking out individual components is Juniper Networks. Taking a look at the chart, you can see that the price recently surpassed the resistance of its 200-day moving average and has started to trade within a defined consolidation pattern. Some active traders are likely waiting for the 50-day moving average to cross above the 200-day moving average, which is known as a golden crossover, before opening a position. A bullish crossover between these two long-term moving averages combined with a break above the resistance would be a clear signal of the start of a long-term uptrend. (For more on this topic, check out: Cybersecurity Stocks in Focus After Massive Attack.)

Cybersecurity is growing in importance, and there are a number of companies in the market that are poised to benefit. For those looking for a quick and easy solution, you may want to check out the HACK ETF and some of its components. Based on the charts shown above, it looks as though we are in the early days of a major uptrend, so it could pay to get in early. (For more, see: Invest in Cybersecurity With These Stocks.)

Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.