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Stocks edge higher, despite economic data

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The widely watched market averages are actually showing gains this morning, despite early morning economic data that was a little weaker than expected.

The Dow Industrials (INDU) 10,305 +0.6% are showing gains lead by SBC Communications (NYSE:SBC) $34.79 +4.16%, Wal-Mart (NYSE:WMT) $58.21 +2.5% and Microsoft (NASDAQ:MSFT) $55.88 +2%. Weakness in the Dow is limited with Merck (NYSE:MRK) $56.17 -1.28%, AT&T (NYSE:T) $13.35 -1.1% and American Express (NYSE:AXP) $44.38 -1%. Breadth for the 30 Dow components is decidedly positive with 24 showing gains and 6 stocks showing a loss.

The much broader major composites has the NYSE Composite (NYA.X) trading up 1.8 points at 581.35, with breadth slightly negative as decliners outnumber advancers by a 14 to 13 margin. The NASDAQ Composite (COMPX) posts a gain of 4 points at 1,729 and breadth there is also negative with 15 decliners for every 13 gainers.

Volume leaders in the NASDAQ have WCOM $1.33 +3%, SUNW $7.22 +3%, CSCO $16.85 +1.7%, ORCL $9.52 +3.6% and INTC $30.33 +0.29% at the top of the active list. On the NYSE, shares of drug maker Pfizer (PFE) $34.88 -4.3% are trading heavy volume of 13.5 million shares. Late yesterday, Dow Jones reported that Pfizer said several state Attorney Generals are looking at Neurontin marketing, and that Pfizer (PFE) faces antitrust suits on Neurontin patents.

Speaking of "drug problems"

Shares of NPS Pharmaceuticals (NASDAQ:NPSP) $22.42 -28% are getting hit to the downside on concerns that a manufacturing problem in the company's Preos drug may delay clinical trial requirements, thus potentially delaying the drugs launch.

We've done some work from our retracement brackets and discussed in this morning's market monitor on OptionInvestor.com. The stock gave a triple-bottom sell signal on its point and figure chart and current bearish vertical count is $9.00, hinting of some potential significant downside.

Here's the chart with two retracement brackets overlaid.

NPS Pharmaceutical Chart - Weekly Intervals

The "red" retracement is perhaps considered "conventional" retracement that a market maker may have been using on the stock in recent months. Today's gap below the $24.96 level would now have the stock vulnerable to the $17.50 level.

However, that "red" retracement is a rather wide range of retracement and should the stock break below the $17.50 level, then it would do a trader little good. We've used the "fitted" retracement technique (in blue) to give traders an idea of what market makers are doing with the stock as they give liquidity to the market for selling on today's "bad news." What we wanted to do was "honor" the $17.50 level as much as possible, as that looked to be a rather important level on a closing basis back on March 22, 2001.

My current thinking is that a market maker in the stock is giving liquidity to the MARKET as he/she buys the stock as others sell it. As the market maker gets a feel for order flow, they must assesses near-term downside to $17.48. As they buy stock here, any rally back near the $26.00 level, most likely then would have the market maker turning toward a "sell bias" and this would perhaps be the most ideal place for a trader to be looking to short/put the stock.

However, volume is brisk today at 6.9 million shares and does look like the stock may be getting "flushed" from some holdings, thus market makers may "step away" from some bids on a break back below today's low.

The rolled down retracement (blue) then gives the market maker and other traders some levels to monitor going forward, if the stock is to ever seek out its current bearish vertical count.

Jeff Bailey
Senior Market Technician
Option Investor

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