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Stocks look suspect

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Today's market environment for stocks looks suspect. The Dow Industrials (INDU) is back below the 10,725 level and this is a level I think traders need to be monitoring. The 10,725 level is derived from our retracement bracket and represents the 61.8% retracement level based on a range between the January 14, 2000 high of 11,723 and the March 22, 2001 low of 9,106. With buyers in bonds driving YIELD lower; I'd expect lack of buying for stocks to be the case.

One positive that might be seen in the market is that the Networking Index (NWX.X) is up 2.6% today. Here's an index that has been the weakest of indexes over the longer-term and today's action really indicates that of short covering. The reason I say this is that some of the stronger indexes of late are seeing some selling and probably some bullish profit taking and risk management. Institutions are a funny bunch, but they do know how to manage risk.

What we want to monitor right now is "both ends of the snake" as I like to think of it. If I believe that the Biotechnology Index (BTK.X) is the favored technology sector then I perhaps understand that today's action is some profit taking in a strong group and some money is being taken off the table and cash raised. If I believe that the Networking Index (NWX.X) is the weakest of sectors, then perhaps institutional shorts are locking in gains on short positions, thus raising cash. Eventually we look for things to resume past trend and money comes back into the biotechnology area and the shorts come back into the networking group when risk/reward again becomes more favorable. The problem I have with trying to play the networking group long or stocks with a networking theme is that I don't know what my risk is to the downside. Is it the recent 52-week low? Or is it some level at 200? Maybe 100? I have no idea where support is for the Networking Index. When risk is uncertain, that to me is a clear sign that I should try and avoid that area until I'm better able to assess the risk level.

Jeff Bailey

Are you being served?

One of the sectors that we don't cover that often is the GSTI Technology Services Index (GSV.X), so lets see what it's been up to.

GSTI Technology Services Index Daily Chart

After failing to crack 166 on its fourth try, GSV pulled back 38% to 153. The index is now trying to rebound, but is it a rally or just a bearish flag forming? Time will tell, but the 50-dma crossing above the 200-dma, and a MACD that looks like it is preparing to roll up hints that GSV could be getting ready for another run at 166.

Ciber Daily Chart

Ciber (NYSE:CBR), which provides IT consulting and outsourcing, is one of the stocks that make up this index. Shares of Ciber ran up almost 100% in April, pulled back in May, and is now trying to move higher in June. Much like the overall index, the moving averages are crossing over, and the MACD is bouncing off the zero line. Volume dried up nicely on the pullback, and now looks to be picking back up. If the Service Index is forming a bearish flag and breaks down, CBR may have trouble getting through resistance at $7.50 to $8.00. If the Service Index can manage to break through resistance at 166, Ciber could find its way to $12 in the coming months.

Jeffrey Canavan
Assistant Analyst

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