The relative strength of different UK stock market segments has shifted.

Several “early cycle” companies that I regularly monitor showed above-
average strength in recent days. They are often among the first to advance when an economic rebound approaches. I suspect that investors are looking past current economic weakness and positioning themselves for the next upturn.

I took a gamble last week by adding to my position in XP Power, an early cycle company. The company will issue its first-half earnings report on Monday. If things go well, a healthy bounce might occur.

XP Power was once a distributor of electronic components. It went through a transformation in recent years and now designs and produces its own components for original equipment manufacturers (OEMs) across a range of industries.

In-house production now accounts for more than three quarters of total revenues and improves the profit margin. Each XP item that is incorporated into a new OEM product triggers a revenue stream that runs for the life of that product – five to seven years on average.

The worldwide economic slowdown did not hurt the company in 2008. Earnings were significantly higher than in 2007, even after subtracting a one-off foreign exchange boost from the figures.

But in spite of this strong performance, its shares lost about half of their value in the second half of 2008 due to fears about the economy. The trend began to improve in February after management stated it expected revenues to increase for the full year.

I regard XP Power’s 10 per cent dividend as another strong plus. Even if Monday’s first-half earnings report disappoints investors, the dividend will provide some support for the share price.

The price graph fascinates me. A massive head-and-shoulders bottom has formed during the past year. I suspect that the pattern has caught the attention of technical analysis fans. Traditional chart theory uses the gap between the bottom of the “head” and the resistance line (or “neckline” as head-and-shoulders fans like to call it) to calculate a price target once the formation runs to completion.

The gap on the XP Power graph suggests a price target almost 50 per cent above current levels once the neckline is penetrated. While I take the precise nature of this claim with a grain of salt, I share the view that conditions are ripe for a healthy price rise.

So, no prizes for guessing that I shall study Monday’s earnings report with great interest. I am not too concerned about first-half earnings. The City estimates pre-tax profits in the £4m area.

My main interest will be management’s expectations for the rest of this year and for 2010. But I would also like assurances that the dividend will be maintained and that the debt will soon shrink. Positive responses to these issues could be the trigger that completes the head-and-shoulders formation and leads to a healthy price rise.

Stock market historian David Schwartz is an active short-term trader, writing about his own trades and strategies. Send any comments or suggestions to tradersdiary@ft.com