The software sector is setting up for another rally.
Our previous trade in the iShares Expanded Tech Software Fund (IGV) yielded a double-digit return in just five weeks. And, when we exited the trade last week on March 18, I suspected the software sector was due for a few weeks of consolidating or downside action.
But, I’ve changed my mind.
The pullback in IGV over the past week has been harsh. It has relieved the modestly overbought conditions in the sector, and it has set up a potentially bullish pattern on the chart.
Take a look…
It looks to me like the chart is setting up an “inverted head and shoulders” pattern.
This is a bullish setup, which indicates the reversal from bearish trend to a bullish one. The pattern forms as the stock makes a lower-low with positive divergence on the momentum indicators – as IGV did in February. Then, following a sharp rally, the stock drops back down to form a “higher low.”
You can see how the right shoulder on the chart is approaching the $80 level at which the left shoulder formed back in early February. If this is indeed the correct pattern, then IGV should bottom near this level and reverse soon.
IGV will then need to breakout above the “neckline” of the pattern – the red dashed line at about $85. That sort of action will confirm the new rally phase, and the software sector will likely be headed higher over the next few weeks.
The upside target of this pattern is the distance from the “head” – at $77.50 per share – and the “neckline” – at $85. That’s 7.50 points. So, we add that to the neckline ($85) and get an upside target of $92.50.
The downside risk is a potential move to a new low below $77.50.
So, from a risk/reward perspective, buying IGV here near $81 gives us $3.50 per share of risk versus $11.50 per share of potential reward.
That looks like a good setup to me.
Best regards and good trading,
Jeff Clark
Editor, Market Minute