This AI-Driven Crash Just Flashed Two Historic Buy Signals

BY LUCAS DOWNEY, EDITOR, TRADESMITH’S ALPHA SIGNALS

There’s an old Wall Street adage: Never catch a falling knife.

They say this because falling prices typically signal a major change in trend. Often, it makes sense to sit tight and wait for the dust to settle.

Think of it like air travel. When turbulence hits, you’ll hear this message over the loudspeaker: “Please return to your seat with your seatbelt fastened.” Even when it’s just a few bumps, the pilot requests this for your safety.

But when it comes to the stock market, playing it safe can keep you out of rare, potentially lucrative trades.

Because sometimes, price action gets so rapidly destructive and turbulent that the odds favor a massive short-term reversal.

Software stocks fit the bill. The group has been absolutely annihilated in the last few months due to fears of AI replacing their business models.

To give you an idea of the destruction, Microsoft (MSFT) has fallen 17% in just three months. ServiceNow (NOW), an IT service management software, has dropped more than 40%. Project management software maker Atlassian (TEAM) is down 44%.

This is an unprecedented selloff. And it’s leading to historic oversold signals in the software group.

Just this past week, two ultra-rare oversold signals fired for software stocks. The odds are high that double-digit gains are coming for the group in short order.

The long-term future of software companies is cloudy. But at least for the next few months, there’s a good chance that the sector could quickly rebound.

Let’s unpack these powerful signals…

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Two Historic Oversold Signals and One Big Trade

Technology stocks are underperforming the S&P 500 in 2026. As of this writing, the Information Technology sector is down 1.3% compared to a jump of 1.92% for the broader market.

Most of this weakness in tech revolves around software names.

Take one of the largest software ETFs, the iShares Expanded-Tech Software Sector Fund (IGV).

This ETF holds large allocations of Microsoft, Palantir (PLTR), Adobe (ADBE), AppLovin (APP) and more. If you’re looking for exposure to major software companies, this is the fund to own.

But it’s been a painful ride recently. Worries around AI cannibalizing the software business have sent IGV down nearly 20% in a month:

It’s a historically painful selloff. Measuring the 14-day Relative Strength Index (RSI) for IGV – a measure of overbought or oversold conditions – it fell as low as 14… its lowest reading in over 20 years.

To give you an idea of how rare this low reading is, I was only able to find a total of six days in history when IGV had an RSI of 17 or lower, in 2001, 2006, and now 2026.

But every single time, IGV was higher over the next six months. And the average gains to follow are huge.

When IGV traded an RSI reading below 17:

Three months later, the ETF jumped 35.2% on average.
Six months later, the fund jumped 31.2%.

If that doesn’t get you excited to buy the dip, look at this…

Alongside the super-low RSI reading, the software ETF IGV fell 11% over three days ending Feb. 5, 2026. Then on the fourth day, it soared 3.5%.

So we had three days of nonstop downside, followed by a swift upward move on the fourth day.

This is another rare signal. There have been only four times in history when IGV fell at least 11% over a three-day span, then bounced at least 2.8% on the fourth day:

Once in 2011
Twice during March 2020 COVID-19 crash
Once in September 2020
And just last week on Feb. 6, 2026

Once again, IGV was always higher on multiple timeframes going out 12 months:

These two signals suggest the selloff has gotten ahead of itself. Rarely has software been so oversold or bounced so hard out of such a state.

History doesn’t repeat, but it does rhyme. And over the short- to mid-term, odds are high we could see a bounce in this beaten-down sector.

You could just buy IGV. But we could potentially do better by finding a strong business caught in the crossfire.

So let’s use this opportunity to search for all-star businesses on sale…

A Strong Stock in a Temporary Smackdown

One of my favorite TradeSmith tools is Jason Bodner’s Quantum Score – a way to look over the shoulders of Wall Street’s biggest institutions.

Big Money traders comprise up to 80% of the stock market’s value. By investing alongside these tidal waves of money, you gain a huge advantage.

The challenge is finding those waves.

Jason Bodner built his Quantum Score System to do exactly that. His years of handling trades from Wall Street’s whales taught him the tricks they use to keep their activity quiet – and how to find them.

His system ranks stocks on fundamental factors, like earnings, revenue, and profit margin growth. That gives us the Fundamental Score.

Then it ranks stocks on their technical strength, driven by their price momentum and buying volumes so large, they can only come from large Wall Street players. This reads out as the Technical Score.

These factors combined to form the overall Quantum Score. But by looking at them separately, we can find stocks with strong fundamental businesses that may be caught up in short-term volatility.

Take Microsoft (MSFT), for example. Its overall Quantum Score of 55.7 is middle of the road and wouldn’t normally signal a buy.

But look at the difference between its rock-solid 92.9 Fundamental Score and relatively weak 29.4 Technical Score.

This looks like an oversold candidate to me: