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Weakness after strong opening

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There may have been some that questioned just how sincere Iraq's offer was to let United Nations inspectors back into the country as investors have noted in the past that actions speak louder than words, but this morning's reversal back lower in stocks is a near-term hint perhaps that investors may be "skeptical" too.

In a written statement, the White House called Iraq's offer "a tactical step" by Iraq to avoid strong U.N Security Council action and some officials indicated that the Iraqi offer meets none of the Bush administration's demands.

The Dow Industrials (INDU) 8,304 -75 (-0.9%) has reversed an earlier 102-point gain as 9 components trade with a gain, while 20 stocks trade lower, with shares of SBC Communications (NYSE:SBC) $24.58 trading unchanged. Weakness is found in recently beaten down McDonald's (NYSE:MCD) $20.25 -6.6%, after the company issued a Q3 earnings warning, saying that due to lower than expected sales in the U.S. and Europe, the company was taking a more cautious outlook. MCD now sees Q3 of $0.38-$0.39 (versus consensus of $0.41). MCD's outlook includes a currency translation benefit of $0.01-$0.02. For 2002, MCD sees EPS of $1.43 or better, versus current consensus of $1.49. In recent weeks, MCD was pummeled lower after a plethora of broker downgrades.

Dow Industrials Average (INDU) - Daily Chart Interval

In recent Index Trader's Wraps, we've discussed to bullish trends in the various major market averages. Should the Dow Industrials close in negative territory today, this would most certainly have to be considered a negative for any bullish thoughts. Key near- term support on the above bar chart is the 8,262 level and a bear still needs a break of that level on a closing basis to achieve my "sing-trader's" target near 8,030, which is near the August 5th low.

Other technicals have both the S&P 500 Index (SPX.X) 884 -0.71% and S&P 100 Index (OEX.X) 443.51 -.7% also reversing earlier- morning highs with technical resistance found right at their trending lower 50-day SMA's we've discussed in the Index Wraps. Similar to the Dow's 19.1% retracement support, SPX support at 19.1% retracement is 869 with OEX 19.1% retracement support at 434. Stochastics are almost "identical" to that found in the above Dow chart.

And while the White House and investors may question the sincerity behind Iraq's UN concessions, tech trader-s appear to also question the benefits of trying to pick a bottom in tech.

Currently, the Biotech Index (BTK.X) 335 +0.56% is the only "tech" sector that trades in the green, and larger weighting among the biotech in the NASDAQ-100 Index Tracking Stock (AMEX:QQQ) $22.43 -1.05% helps keep the QQQ above trend (approximately $22.17) on its bar chart. However, tech bears like the weakness and new 52-week low in the Networking Index (NWX.X) 106.29 -2.6% and Semiconductor Index (SOX.X) 265 -1.3% as near-term sign that bears may not yet be willing to get eager with short-covering.

Software stocks, which also make up a larger weighting in the QQQ and depicted by the GSTI Software Index (GSO.X) 92.36 -1.54% are breaking yesterday's low. Bears may be monitoring sector support here at the 89.63 level and perhaps correlating with Microsoft (NASDAQ:MSFT) $47.82 +0.12% support at $46. It's notable that this morning's rally in MSFT found resistance at its 50-day SMA of $48.84. MSFT is the largest weighted component of the QQQ and QQQ bears want/need this stock to break $46, and trade $45 on its point and figure chart to have MSFT breaking bullish support trend and getting the stock back on a "sell signal" to negate the current bullish vertical count of $72. MSFT is also a Dow component and heavier weighted stock in the S&P Indexes.

Jeff Bailey
Senior Market Technician
Option Investor


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