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"Rational" exuberance

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The software sector and broader technology are getting some "rational" exuberance today as shares of Rational Software (NASDAQ:RATL) jump 10% after reporting earnings that beat the street estimates.

Rational Software Chart - Daily Interval

Several subscriber e-mails from this morning have them trading a bullish move and the "inside day" from yesterday in shares of Rational Software (RATL) this morning. This is a stock we talked bullish on in the "market monitor" Wednesday morning and today's break above retracement of $23.30 sets the stage for bulls to be targeting a next level of retracement resistance near $26.61. With the stock recently meeting its bullish vertical count of $22 from its point and figure chart, traders are now perhaps using retracement that I've left in place dating back to June 28th. If you get a chance, you may want to read what we were saying about RATL back during that time. http://members.OptionInvestor.com/archive/intraday/062801_4.asp

GSTI Software Index Chart - Daily Interval

Rational Software's (RATL) bar chart looks almost identical to that of the GSTI Software Index (GSO.X) and this makes for good correlation and trade management. An equity bull in RATL is looking for some group participation to help fuel a move higher. A trader can trade bullish in RATL, monitor the GSO.X going forward. Should the GSO.X begin to falter back below the $190 level and RATL begin to stall out, a bullish trader may then pull the plug on his/her RATL trade. The GSO.X looks bullish here as MACD continues to trend higher after just recently crossing back above its signal. Always try and correlate your trades with a corresponding index. The stock you're trading doesn't necessarily have to be a component of the index, but group bullishness has most often will impact price action of related sector stocks.

According to Dorsey/Wright and Associates (www.dorseywright.com) the bullish percent for the software sector is bull confirmed at 62%. Yearly subscribers will be getting my point and figure booklet that will discuss market/sector/stock correlation and use/understanding of the bullish percent data.

Jeff Bailey
Senior Market Technician
Option Investor

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