Autodesk Moves to the Front of the Class

The resurgence in the technology sector continues. The Nasdaq 100 (NDX) has broken out to new highs, and the large-cap technology stocks continue to lead the way higher. A narrow internal advance off of the mid-August lows has also been made by tech. We know this because in spite of the strength in the technology indices, the breadth line for the group has not confirmed the move.

The divergence in breadth suggests that a narrow band of large-cap stocks are generating most of the price action in the sector. Our experience tells us that as a group emerges from a base formation, the largest-cap names will lead. Traders are hesitant to buy secondary names and tend to stick to the large-cap stocks until confidence in the rally grows. Once confidence grows and a bullish theme takes hold, traders' risk-tolerance increases, and liquidity flows into the secondary and tertiary names.

Software HOLDRs

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The software subsector in technology is starting to emerge from a large base formation, and money is starting to flow toward the group. Leadership names in the sector, such as Oracle (ORCL - commentary - Cramer's Take) have lead the technology move higher, but it now looks like some of the secondary names are starting to gain momentum.

The group is dependent on strong corporate spending and strong PC sales. In spite of the recent concerns over slowing economic growth domestically, both the global PC market and corporate-technology expenditures are growing at a brisk pace this year. The environment for software companies is growing more bullish.

Autodesk

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One stock in the software sector that is looking attractive from a technical viewpoint is Autodesk (ADSK - commentary - Cramer's Take). Autodesk is the leader in 2-D and 3-D engineering design software and has a very interesting weekly chart in place right now.

The stock has formed a large head-and-shoulders consolidation since late-2005. The stock has recently broken out over resistance and is confirming the bullish pattern. We would look for the stock to resume the primary long-term uptrend from these levels. The "measured move" out of the head-and-shoulders pattern gives us a target price of $60 on the stock, but a break below the $45 level would suggest a failure, and we would use this level as a stop loss.

The technology sector is making a significant long-term improvement in the price action, and as long as we see a continued broadening of the liquidity in the group, it should rally into next year.

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At the time of publication, John Hughes and Scott Maragioglio had no positions in the stocks mentioned. Hughes and Maragioglio co-founded Epiphany Equity Research, which has developed and utilizes proprietary tools to identify and track liquidity changes in the market indices and sectors. Hughes advises numerous asset managers, hedge funds and institutions managing in excess of $30 billion. Maragioglio is a member of the market technicians association (MTA) as well as The American Association of Professional Technical Analysts (AAPTA) and holds a Chartered Market Technician (CMT) designation. Maragioglio has also served on the board of directors of the AAPTA.