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Software, Disk Drives and Gold

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It has been a battle for leadership today, but as I type, it is the GSTI Software Index (GSO.X), Disk Drive Index (DDX.X) and Gold/Silver Index (XAU.X) that are leading sector winners.

GSTI Software Index Chart - Daily Interval

Sometimes it takes just one stock to push a group higher when they've been flirting with a breakout. In recent sessions we've been getting bullish some software names and this morning's announcement from SAP that it would post revenues substantially higher than estimates was all the bulls needed to get an extended rally going in the group. In this morning's market monitor I liked shares of software maker Rational Software (NASDAQ:RATL). That stock had been acting strong at retracement levels and this morning's upgrade from SG Cowen most definitely helped fuel the fire there.

Disk Drive Index Chart - Daily Interval

The Disk Drive Index (DDX.X) has traded our retracement bracket almost like a pianist plays the scale. Each level that has been broken to the upside has acted like support for the pullback. Today's upside guidance from Hutchinson (HTCH) comes after a disastrous quarterly earning report from November 6th. Shares of HTCH pulled back to the $19 level immediately following those terrible earnings (they missed by a mile), but the stock traded sideway for about two weeks then started moving higher. So did the group and somebody knew about a brightening future for the group. Look for a run to the $123 level near-term and be willing to sell strength for stocks you may hold long in the sector.

Gold/Silver Index Chart - Daily Interval

Today's gains aren't just being found in technology stocks. The Gold/Silver Index (XAU.X) listed on the PHLX (www.phlx.com) has also caught fire. In recent sessions we've been talking about the bullish technicals developing here and today's move is bold. Overhead supply in the $57-$60 range is going to be a challenge, but this group has a tendency to move like a hot knife through butter. The key for traders is to sell strength. I think the XAU.X fueled by recent Argentina worries, today's consumer credit numbers and a potentially heating up economy could have this group testing the $62 level in the not too distant future. A stock we mentioned recently was shares of Placer Dome (NSYE:PDG) near $11.64.

Jeff Bailey
Senior Market Technician
Option Investor

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