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.

Related Articles
  1. Chart Advisor

    Gold Struggles to Climb Higher and May Fall Soon

    Traders will be watching the price of gold over the coming weeks. We'll take a look at how a couple major moving averages are suggesting that the next move could be lower.
  2. Technical Indicators

    Use Market Volume Data to Determine a Bottom

    Market bottoms often carve out classic volume patterns that let observant traders make fast and accurate calls.
  3. Charts & Patterns

    Understand How Square Works before the IPO

    Square is reported to have filed for an IPO. For interested investors wondering how the company makes money, Investopedia takes a look at its business.
  4. Trading Strategies

    Who Actually Trades or Invests In Penny Stocks?

    Although penny stocks are highly speculative, millions of people trade them daily. Here are 10 different types who do.
  5. Chart Advisor

    4 Stocks Still Flashing Buy Signals

    In the midst of volatility and a big market sell-off last week, these stocks are flashing buy signals.
  6. Technical Indicators

    Understanding Trend Analysis

    Trend analysis is the use of past performance to predict future price movement of a security.
  7. Trading Strategies

    How To Buy Penny Stocks (While Avoiding Scammers)

    Penny stocks are risky business. If want to trade in them, here's how to preserve your trading capital and even score the occasional winner.
  8. Chart Advisor

    Stocks to Short...When the Dust Settles

    Four short trades to consider, but not quite yet. Let the dust settle and wait for a pullback to resistance for a higher probability trade.
  9. Technical Indicators

    Using Moving Averages To Trade The Volatility Index (VIX)

    VIX moving averages smooth out the natural choppiness of the indicator, letting traders and market timers access reliable sentiment and volatility data.
  10. Chart Advisor

    Strategizing for a Market Fall...or Rally

    The downtrend isn't confirmed yet, so be prepared with trades for whether the stock market rallies or continues to fall. Here's how to do it.
RELATED TERMS
  1. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  2. Indicator

    Indicators are statistics used to measure current conditions ...
  3. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  4. Mass Index

    A form of technical analysis that looks at the range between ...
  5. Money Flow Index - MFI

    A momentum indicator that uses a stock’s price and volume to ...
  6. On-Balance Volume (OBV)

    A momentum indicator that uses volume flow to predict changes ...
RELATED FAQS
  1. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  2. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  3. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  4. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
  5. How do you know where on the oscillator you should make a purchase or sale?

    Common oscillator readings to consider making a buy or sale are below 20 or above 80, respectively. More aggressive investors ... Read Full Answer >>
  6. What are the alert zones in a Fibonacci retracement?

    The most commonly used Fibonacci retracement alert levels are at 38.2% and 61.8%. A 50% retracement level is also commonly ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!