Key Takeaways:
After months of underperformance, technical signals suggest a potential catch-up rally could be starting for beaten-down software stocks.
Lagging software stocks are showing signs of a technical turnaround, with ServiceNow and Adobe both breaking out of bearish patterns in a move that could signal a broadening of the technology rally beyond semiconductors and AI hardware. For much of the recent market advance, capital was concentrated in AI infrastructure and megacap tech. Now, the iShares Expanded Tech-Software Sector ETF (IGV) is heading for a six-week winning streak, outperforming the VanEck Semiconductor ETF last week.
"Failed bearish patterns can lead to fast moves in the opposite direction," said Doug Busch, senior technical analyst at Barron's Investor Circle, noting ServiceNow's recent break above a bear flag pattern.
ServiceNow (NOW), which had fallen 32% year-to-date, jumped 13% last week, reclaiming its 50-day moving average. Adobe (ADBE) has advanced for four of the last five weeks and is forming a bullish ascending triangle after a 27% year-to-date decline.
The nascent rally suggests investor capital may be rotating into undervalued software names. A technical analysis from Barron's projects a potential 46% upside for ServiceNow to $150, while Adobe could see a 17% gain to $300 by mid-2026.
ServiceNow has lagged significantly, falling 50% over the last year. However, several encouraging technical developments have emerged. The stock jumped nearly 9% on Monday alone, reclaiming the critical $100 level which had acted as support earlier in the year. This move completed a bullish island reversal pattern, following a sharp 18% gap down on April 23.
The technical strength is underpinned by strong fundamentals that analysts believe the market has mispriced. According to a recent analysis on Seeking Alpha, fears of AI cannibalizing the SaaS sector are overblown for ServiceNow. The company posted 22% subscription revenue growth in its first quarter and a 97% customer retention rate, prompting it to raise full-year guidance. Despite this, the stock had fallen 16% after the report, compressing its valuation to a more attractive 25.89x non-GAAP P/E.
The bullish technical outlook is supported by a price target of $150 later in the second half of the year, representing a 46% gain from its Tuesday price of around $102. The analysis suggests the bullish outlook remains intact as long as the stock holds above the $95 level.
Adobe, another former software leader, has also been hit hard, dropping 38% over the last year. The stock has declined after its last six earnings reports. However, it has recently shown resilience, advancing in four of the last five weeks and closing in the upper half of its weekly range each time.
The daily chart shows the formation of a two-month bullish ascending triangle, a pattern that often precedes a breakout to the upside. On Monday, the stock showed notable relative strength by rising 3.2% and reclaiming its 50-day simple moving average. Other positive signs include a bullish morning star pattern on April 13 and a bullish island reversal triggered by a 4.5% gap higher on May 15.
The technical setup suggests a potential advance toward $300 by mid-2026, which would be a roughly 17% upside from its current price of around $256. The bullish case remains valid as long as the price stays above the $245 support level. While peers like Datadog and CrowdStrike have already seen massive rallies of 44% and 55% respectively, the improving technicals for ServiceNow and Adobe suggest they could be next to play catch-up.
This article is for informational purposes only and does not constitute investment advice.
