AI-Driven Selloff Pressures Software Sector
Software related stocks got pummeled on Tuesday, as sentiment grew more bearish due to concerns about the impact of artificial intelligence (AI) on the industry. Fears were triggered following a disappointing earnings release from PayPal (PYPL) pre-market. Also, Anthropic released productivity tools for attorneys, which increased selling pressure on related legal publishing and software firms. Risks to the sector have been rising in recent months in anticipation that further advances in AI will cause a greater threat to software business models. Given the sharp declines across the sector, once support is found, buyers may return.
XSW weekly chart shows approach towards long-term uptrend line and 200-day average support (Source: TradingView)
XSW Confirms Head and Shoulders Breakdown
The SPDR S&P Software & Services ETF (XSW) is a proxy for the sector. It broke down from a head and shoulders top reversal pattern last week, on a drop through a swing low at $174.03 and then the neckline of the pattern around $172. Bearish follow-through has been sharp and decisive, leaving little doubt that the sellers are in charge. XSW reached a low of $153.85 on Tuesday. Nonetheless, XSW is rapidly approaching a potentially significant support zone at the convergence of several indicators near $152.
XSW daily chart shows head and shoulders bearish reversal and decline towards support zone. (Source: TradingView)
Support zone converges near $152
When multiple indicators point to a similar price zone, that area can act both as a magnet, pulling price to it, and a strong support zone in the case of XSW. A 78.6% Fibonacci retracement of the previous upswing is at $152.15, and a 141.4% (√2) projection of a bearish measured move points to $152.04. Further, a long-term uptrend line is currently rising through that price zone. If there is an overshoot to the downside, then the 200-day average is at $149.75, providing a lower potential target zone. Since XSW has fallen hard and is very close to that long-term average, it wouldn’t be surprising for it to be hit before the current retracement bottoms.
Pattern targets $142–$144 if support fails
The head and shoulders pattern suggests a lower target could be reached. Measuring the pattern provides an initial downside target around $141.79. Of course, that level would be preceded by a failure of support at the uptrend line and 200-day average. That target is derived when using the neckline as the bear trigger. However, if the swing low at $174.03 is used, a target at $144.12 is indicated.