Why Bitcoin’s Divergence From Software Stocks Is a Warning Sign

The AI-fueled stock market rally is spreading… even to the software stocks that investors thought AI left for dead.

“Software as a service” (SaaS) companies like Microsoft (MSFT) and Palantir (PLTR) have experienced a recent resurgence. We can see the sector-wide move in the iShares Expanded Tech-Software Sector ETF (IGV).

Back in February, AI advances led investors to question the value of SaaS companies whose software could easily be replicated and replaced by AI models for cheaper.

During the “SaaSpocalypse” that followed, software stocks plummeted, with IGV falling 37% from its peak.

But I went on the record multiple times to show you that conditions for a rebound were developing. Since then, IGV has gone on a massive rally.

Now a key indicator supporting that rally has gone missing. So let’s check in on IGV’s rally and see if a reversal lower could be in the works…

IGV’s 35% Rally Since April

In late February, IGV started testing a key support level that stretches back to the beginning of 2024.

Anytime IGV pulled back, the $77-80 support level held and sparked a rally. That includes the latest rally that started back in April.

Here’s what I had to say back then:

The same chart level I highlighted before is coming into play… along with another round of positive divergences. Here’s the updated chart:

IGV is trading back at the $77–$80 zone. Not only was that level tested at the end of February, but you can see how this major support zone has sparked a rally on multiple occasions going back to 2024.

While the 50-day moving average (MA – blue line) is catching up to price, a large positive divergence is forming with the Relative Strength Index (RSI).

Since then, IGV has rallied as much as 35% as AI fears subsided and mean reversion took hold. But as IGV’s upside has accelerated recently, a key confirming indicator has gone missing.

Here’s why you should question if there’s additional upside in IGV and software stocks…

What IGV’s Rally Is Missing

Bitcoin and software stocks have been highly correlated since at least late 2024. Their directional movements have been closely aligned since then.

There are several possible explanations for the correlation.

Both groups are sensitive to the outlook for liquidity and financial conditions. And Bitcoin and software companies could both face existential threats from AI.

Bitcoin and software may also share a similar investor base, making both sensitive to changes to risk-on and risk-off sentiment.

But starting in mid-May, that correlation has broken down. Here’s the chart plotting Bitcoin (blue line) and IGV (black line) below:

Since May 15, IGV has accelerated higher while Bitcoin has taken a sharp turn lower (circle).

There’s no good explanation for the divergent price action, which means I’m on the lookout for a reversal in both assets.

IGV looks stretched to the upside while Bitcoin is approaching key support at the $65,000 level. This could be a good time to take profits on IGV while positioning for a rebound in Bitcoin.

Happy Trading,

Larry Benedict
Editor, Trading With Larry Benedict