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Too much fiber

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Shares of Emulex (NYSE:ELX) $16.20 -31% are getting hit to the downside after the developer and supplier of fiber channel host adapters for the storage networking industry guided lower for its fiscal first quarter, expecting revenues and EPS of $68-$73 million and $0.16 versus analysts' consensus of $74.7 million and $0.16. The company also guided lower for its fiscal 2003 (June 03) saying revenues are expected to be closer to $305-325 million versus consensus of $338 million. However, the company did guide EPS higher to $0.70-$0.75, which was slightly above consensus of $0.70.

Emulex Corp. Chart - $1 & $0.50 box

Today's sharp decline in ELX on slower top line growth continues to hint that investors are still learning that many large customers are still cutting costs and trying to drive as much earnings to their bottom lines. With a surplus of fiber in the markets, price competition is fierce and demand still lacking. As such, communication and storage equipment/component makers still not seeing any top line growth. Bottom line growth continues to come from cost cutting in this sector too.

QLogic Corporation (QLGC) - $1 box

While the NASDAQ-100 Bullish % ($BPNDX) is currently "bull correction" at 26%, reading of 22% would have this market back in "bear confirmed" status. As such, "like stock" to Emulex (ELX) has the point and figure chart of QLogic (NASDAQ:QLGC) $35.83 - 8.80% looking suspiciously similar to that found in ELX prior to today's drubbing. The triple-bottom sell signal at $36 can be a high probability bearish trade as Professor Davis' study showed that under "bear market" conditions, the triple-bottom sell signal is profitable for a bearish trader 93.5% of the time, for an average gain of 23% in 3.4 months. From $36, that would have a bear looking for a target of $27.72 in the next 3.4 months.

Brocade Communications (BRCD) - $0.50 box

Another "like stock" to Emulex (ELX) and QLogic (QLGC) is Brocade Communications. Vertical count is bearish to $12.50 and may be a stock to look at shorting, but would prefer a rally back to the $17.00 level, then target $12.50. Three "fiber-related" stocks, all on sell signals, with bearish counts hints this group is out of favor. Today's action in ELX will most likely have some bears looking short/put on rallies or further breakdowns.

With the broader S&P 500 Bullish % ($BPSPX) in "bull alert" status, would only consider partial 1/2 positions short/put currently. As it relates more to each of the above 3-stocks, bearish traders would want the NASDAQ-100 Bullish % ($BPNDX) to turn "bear confirmed" to signal further internal deterioration in the larger technology arena.

Jeff Bailey
Senior Market Technician
Option Investor


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