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Correlate your trades!

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Lots of subscribers are short/put quite a few software stocks from previous commentary and it now becomes important to monitor not only some that have been closed out for handsome gains like Check Point Software (CHKP) $22.00 (for PI subscribers, we're going to close this one out in tonight's play list, so I'd close out per 09:00 comments and $21.50 now!).

Check Point Software (CHKP) was one of our "tail of the snake" type stocks that we thought might get punished to lower regression and it has. Now we'll monitor for any further weakness or recovery from here.

But what a trader really needs to do is understand that CHKP did trade the lower part of regression support and tie that in with the "group" or the GSTI Software Index (GSO.X), which once again leads today's sector decliners with a 3% loss.

GSTI Software Index Chart - Daily Interval

If the "tail of the snake" in CHKP hit our target of lower regression, then perhaps we look for the pulling of the tail to have the entire "body" in the GSTI Software Index (GSO.X) doing the same. This is when group action can be so important in trade management.

The thought is that the weaker stocks like CHKP should lead lower and it has. That bearish downside action tends to pull on the sector. A couple of days ago a stronger stock in PSFT got crushed so subscribers were on even higher alert that weakness could be found in the sector. Yesterday in the market monitor we referred to this action as "bear bait" and good bearish trades most likely existed.

Now, its my belief that strong stocks usually lead a recovery, so it becomes important to at least monitor CHKP going forward. If the "tail" begins to anchor itself, the we look for the "head" and even the body to begin to firm. Since CHKP has done almost exactly what a trader felt it might do at lower regression, we don't want to throw that accurate analysis out the window and think it couldn't happen in the GSO.X.

A trader that is short/put any number of software stocks is most likely having the best success with some of the weaker names that were in a technical position like CHKP was a couple of days ago, if not yesterday. The weak stocks should be outperforming to the downside, while the stronger technically may still be going lower, but not at such a great rate.

What a bear needs to be watching for in the coming sessions is the GSTI Software Index (GSO.X) which is a broader coverage of software names. If the GSO.X gets close to the 140 level and lower regression like it did from February 20-22, then be on the alert for potential firming ("Watch for this" on the above chart.)

By goodness, if you've got a nice gain going in another put/short trade in a software stock, lower the stop to protect against a rally like that which took place from February 25 to March 11, when the GSO.X ran the range from regression. If you were holding March expiration puts during that run you saw profitability turn to loss.

At the same time, if CHKP were to continue to firm, then one has to be thinking that bears are willing to cover at regression or support levels. After all, smart money bulls probably don't have CHKP on their "near-term buy" recommended list right after an earning's warnings. The bulk of buyers are going to be some "smart bears" from higher levels locking in gains!

The comments regarding the GSO.X and regression near 140 should be understood, especially by traders that have established some positions in some software stocks that have shown stronger relative strength during the recent decline. It's those stronger stocks that institutional bears aren't as likely to have shorted that will find the first strength from bulls that have conviction toward a stock that has held up, that find the pullbacks due to "group think" most attractive at the lower levels.

I have been inundated with subscriber's questions regarding multiple software stocks as shorts. I'm hoping that you will use the GSO.X sector chart above and CHKP comments/correlation to help you with the stocks your looking at. If you find a stock that just isn't falling with the sector, that could well be a stock to put on your bullish watch list should the GSO.X rebound for a trade!

Jeff Bailey
Senior Market Technician
Option Investor

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