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Some software stocks having trouble

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Shares of Adobe Systems (NASDAQ:ADBE) have shown some concerning weakness in the past couple of weeks as have some other stocks in the sector. A quick look at the GSTI Software Index (GSO.X) shows there may still be some downside to the group and that has us looking at different stocks that offer traders different type of technicals to be shorting. One stock that I find attractive that fits the "short the rally" scenario is shares of PeopleSoft (NASDAQ:PSFT). First, lets take a look at the sector, then see how the technicals of PeopleSoft (PSFT) could affect the outcome.

GSTI Software Index Chart - $5 box

The downward trend as characterized by the bearish resistance trend is what a bearish trader wants to see. This trend will eventually be reversed to the upside, but this sector has shown a pattern of rallying to trend, then reversing lower to a lower series of lows. The current bearish vertical count indicates a bearish price objective for the sector of 165.

PeopleSoft Chart - $1 and $0.50 box

With some other stocks like Oracle (NASDAQ:ORCL) and Adobe Systems (NASDAQ:ADBE) breaking recent support levels and flashing some signs of weakness, I'm looking at the recent rally in shares of PeopleSoft (PSFT) as one that might fade and provide a bearish trader with a relatively low risk/ higher potential return type of trade. The bearish price objective for the stock is $28 and that's more than enough potential downside room for a trader just targeting the $35-$30 level. If the GSO.X is going to achieve its bearish price objective, then my thinking is that a stock like PSFT is going to experience a pullback. I like the stock short with a stop at $46 to $48 depending on the subscribers risk tolerance and targeting the $35-$30 level. Look for a 3-box reversal to $41 to have volume picking up on the downside move. One strategy a trader could use in shorting/putting shares of PSFT is to initiate 1/2 position at current levels of trading ($43.50) and then add to full position once a 3-box reversal is achieved.

Good stocks to be monitoring with a trade in PSFT to get a better feel for the group are shares of MSFT, JDEC, SAP, ORCL and ADBE. Some stocks are breaking support trend, while others are holding support trends. At this point, a trader's best trade is to do a little mixing and matching. For instance, I've been bullish on MSFT as it is sitting right on top of bullish support and risk/reward is favorable. The stock has had a tendency to trade on its own and away from the group. A stock like PSFT that has had a nice recovery rally after breaking longer-term trend may become suspect on further group weakness. A trader holding a long position in MSFT and short position in PSFT can manage their risk, then sell the position that moves against them for a small loss. I think the technicals are still favorable for a MSFT advance and PSFT decline, using sector analysis to get the broader feel for how things play out.

Jeff Bailey
Senior Market Technician

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