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GSTI Software Index has room to run

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Software stocks are showing good strength today as the GSTI Software Index (GSO.X) adds a nice 2.32% gain to $154.60. Today marks the release of Microsoft's (NASDAQ:MSFT) Windows XP and that looks to have software stocks finding some bidders.

GSTI Software Index Chart -

The weekly interval chart of the GSO.X shows that major damage has been done to software stocks in the past 18-months. Using conventional retracement from the March 2000 highs to recent lows makes it very difficult for a trader to control their risk, but there's some upside to the $200-$214 level for traders targeting the 40-week (200-day MA) or 19.1% retracement.

Relative Strength of GSO.X vs. S&P 500

The relative strength chart of the GSO.X vs. SPX has been improving, but lack of a "buy signal" should have traders looking for rally opportunities ONLY at this point. The GSO.X has given 4 consecutive relative strength sell signals without a RS buy signal since November 2000. The columns of X's show brief rallies where software stocks outperformed the S&P 500, but that out-performance was short-lived. Eventually, the tables will turn and the group will gain sponsorship on a longer-term basis. For now, we're looking bullish, but tight stops and reasonable targets are the game plan.

Jeff Bailey
Senior Market Technician
Option Investor

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