My preference is to trade strong stocks that are simply consolidating and ridding themselves of weak hands, hopefully just in time to ride the next wave higher. Software ($DJUSSW) has been consolidating for the past couple months and appears poised to rebound from its latest 50-day SMA test: Software is close to its relative support line and this period of consolidation has led to the RSI dropping into its key 40-50 range. I didn’t annotate it, but if you look back at the recent price peaks, you’ll see lower PPO readings, resulting in a negative divergence. When these occur, I look for subsequent PPO centerline tests and/or 50-day SMA tests to “reset” momentum. Those have both essentially been accomplished during this period of profit taking. Note that the volume really tailed off on the selling last week. Upcoming strength and a breakout could lead to a number of software stocks…
