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Telecom equipment hardest hit from WorldCom debacle

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Shares of long-distance provider WorldCom (NASDAQ:QCOM) $0.83 remain halted for trading after plunging as low as $0.23 a share (-72% from Tuesday's close) in pre-market trading. While investors in that beleaguered telecom service provider await the fate of a lower open, other telecom service providers and especially the telecom equipment stocks, that represent those companies depending on the "WorldCom's of the world" to buy their wears, are also suffering further stock price declines.

Telecom-related indexes have the Wireless Telecom Index (YLS.X) 40.12 -4.15%, Fiber Optic Index (FOP.X) 41.62 -8.10%, Networking Index (NWX.X) 139.82 -5.45%, Combined Telecom (IXTCX) 101.81 - 3.33% and North American Telecom Index (XTC.X) 378.05 -6.96% all suffering declines.

Practically every stock that has some tie or association to the telecom sector is now being painted with a broad brush loaded with red paint, based on fears that similar accounting practices revealed at WorldCom (WCOM) may be revealed elsewhere.

Verizon Communications Chart - $1 box

From past bearish profile that began near the $42 level, bearish traders in Verizon (NYSE:VZ) $37.39 -3.31% got the triple-bottom sell signal at $38 they wanted to get the longer-term bearish count hinting at lower prices. Today's trade at $38 puts the point/figure chart of VZ back on a "sell signal" and creates a bearish vertical count column that hints at downside vulnerability to $29.

Under bear market conditions, Professor Davis' probabilities study showed the triple-bottom sell signal was profitable for a bearish trade 93.5% of the time, for an average gain of 23% in 3.4 months. Traders holding puts should check expirations against this probability study to make future trading decisions.

According to Dorsey/Wright and Associates, the telecom group is currently "bear confirmed" at 11.85% and would be considered longer-term oversold conditions. As such, trader's holding current month expiration should most likely be lowering stops to break-even levels at a minimum and looking to lock in some partial gains on spike lower in put options they hold, then look to roll to further out dated expiration on rallies to resistance levels where overhead supply exists.

Jeff Bailey
Senior Market Technician
Option Investor

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