The business software group is a sector traders should be watching closely over the next few days on the heels of a positive EPS report from International Business Machines (NYSE:IBM) Tuesday evening. While IBM technically falls under the computer hardware group, it has been transforming its business for years and now greatly benefits from its service arm. One of the positives from the report was that IBM also offered a brighter outlook for 2011 on the heels of a recent increase in signed outsourcing agreements. IBM's outsourcing business had declined the previous three quarters compared with the same periods a year earlier, a trend that worried analysts. The positive comments should provide a boost for service-oriented stocks, and many charts in this sector are looking great.
Starting with IBM itself, one can see that IBM cleared a larger base in September leading to a several week rally. It then settled into another consolidation to close out the year. It started to emerge from this consolidation early in 2011 and is now at all time highs. With an expected gap higher, it may not be wise to chase IBM, but this is a stock with a healthy chart to go along with its rosy outlook.
Quest Software, Inc. (Nasdaq:QSFT) is one stock that may benefit if investors associate IBM's report with increased IT spending. QSFT has a vast product line that integrates with other vendors' software or hardware platforms. If business is good for these vendors, then it should be good for QSFT. As far as its chart, QSFT is looking very good here as it consolidates in a tight range between $27 and $28 per share. A break above this range could lead to a great trading opportunity.
Kenexa Corporation (Nasdaq:KNXA) is another stock in this group with a nice looking chart. KNXA cleared a base in early December after a sharp rally earlier in September. It has settled into a rectangle formation and is now trading between approximately $21.25 and $23.00 per share. Traders should watch for a move out of what is also a tight range.
NetScout Systems, Inc. (Nasdaq:NTCT) is another stock showing good potential in the business software group. NTCT settled into a consolidation from October through January following a sharp rally that carried it from under $16 to over $24. It recently cleared this base and is pausing near its highs around $25 per share. It may consolidate further to test its breakout so traders should keep an eye on the $24 level for support. (For more, see The Anatomy Of Trading Breakouts.)
While it's not a certainty that IT spending will increase this year, the fact that a large player like IBM is seeing an increase in business may act as a potential catalyst for the group. Many charts in this sector are showing buying pressure which seems to agree with this outlook. Traders should keep an eye on this group as market participants may buy into these names rather than chasing IBM higher. With healthy charts and a possible catalyst, it's certainly one group I will be watching. (For more, see Technical Analysis: Introduction.)
Charts courtesy of stockcharts.com
At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.