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Stocks recover from earlier losses

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Both the NASDAQ Composite (COMPX) and S&P 500 (SPX.X) were able to trade back into positive territory as the market begins to digest today's earning's warning from IBM.

One sector we've been alerting bears to look to lock in some gains are in the software sector. Last week we worked extensively to outline the GSTI Software Index (GSO.X) and that bears in the sector might look for the GSO.X to find bidders near the 140 level. This morning's low was 141.75 and since that time, the group has indeed found bidders.

GSTI Software Index Chart - Daily Interval

The GSTI Software Index (GSO.X) found some bidders right near our 80.9% retracement level. This group got hit hard last week amid earnings warnings from PeopleSoft (PSFT) and Check Point Software (CHKP), but has bounced back today and leads sector gainers.

I would not consider today's rally "overly bullish" for the sector, but the action does hint just how quickly things can turn from a level of support. Should the GSO.X manage to break back much above the mid-point of our regression channel near the 152 level, the bears need to immediately assess risk to the upper level of regression near the 165 level. There we see a nice "crisscrossing" of downward regression and retracement along with a still rounding lower 50-day MA. That might just make for another short/put entry point in some weak stocks that rally due to short covering.

What a bear needs to at least be cognizant of currently is that one of the weaker technology groups may be trying to "anchor" itself near a level of support. With one of the stronger groups in the market and the deeper Cyclicals (CYC.X) breaking above Friday's high, we are seeing a strong group actually lead. If the "bottom of the snake" in the software stocks begins to anchor, then bears will have been well served to implement some account management and lock in some gains with tight stops.

Despite fears of higher energy price, we're also seeing the Dow Transports (TRAN) 2,754.81 -0.84 recover from earlier losses. I've set an "upside alert" on the TRAN at the 2,816 level and should we see a move back up above that point, the bears need to be further concerned that the rest of the MARKET may indeed be finding more aggressive bullish buyers. That could then have bears in technology stepping up their profit taking.

Jeff Bailey
Senior Market Technician
Option Investor

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