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"The CAT" sings the blues for technology

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If you thought that Caterpillar's (NYSE:CAT) $63.54 +8.35% signature yellow and black heavy equipment machinery was powerful looking, then Q3 earnings report of $1.15 EPS, which handily beat Wall Street's estimates of $0.66% almost single-handily kept today's declines in the Dow Industrials (INDU) 9,050.82 -0.42% in check, as fell Dow component "Big Blue" (IBM) $83.33 -3.93% spurred selling among technology stocks and had the major indexes all finishing in the red.

Traders seemingly ignored economic data that showed further signs of recovery and seemed focus on the view that gains for many stocks were unwarranted as some company's expressed a still cautious outlook with a plethora of earnings reports released today.

After today's trade, the fundamental investor may be scratching their heads. Intel (NASDAQ:INTC) $24.93 -1.5% jumps 5% just yesterday after beating estimates by a penny, while IBM earnings that came inline with consensus as did handset maker Nokia (NYSE:NOK) $14.40 -19.77% both get hit lower and trigger a broader sell off in technology as outlooks going forward remain unclear.

At this point, investors and traders seem to have come to a conclusion that if you don't blow the numbers away, you'd better say something positive about the future.

No. Maybe not. After the bell, another Dow component and technology giant Microsoft (NASDAQ:MSFT) $26.69 -3.01% rose to $27.27 in after-hours trade as investors mull through what has become one of the more confusing quarterly earnings reports in market history. Littered with one-time charges here and one-time gains there, analysts that follow the stock and have to come up with an earnings estimate are probably not getting paid enough. The "preliminary" Q4 EPS of $0.23 looked to have missed estimates by a penny (stock compensation expenses were not included in this quarter) while revenues rose 11.2% year-over-year to $8.07 billion, which was above consensus estimates of $7.87 billion. In forward-looking statement, the software giant said is sees Q1 EPS (September) of $0.23, which includes $0.06 in stock compensation expense. Now... hold on. Consensus estimates (which don't include stock compensation expenses at this time) are for MSFT to earn $0.25 per share, so I (Jeff Bailey) am going to call consensus (including stock compensation expenses) a comparable $0.19 per share. The easier number to track has MSFT looking for Q1 revenues of $7.9 billion-$8.1 billion, which would appear to be at the high-end of $7.89 billion consensus.

Today may have been a day for traders and investor to raise some cash. I know it was for my account. Stopped out early in a bullish trade in the NASDAQ-100 Tracking Stock (AMEX:QQQ) $31.18 -3.04% at $32.12 and a bearish trade dating back to July 1 in the S&P Depository Receipts (AMEX:SPY) $98.50 -1.2% at $99.12, I will admit I had greater anxiety in closing out the bearish SPY position than I did the QQQ bullish trade.

As I closed out the QQQ trade early in the session, I'm not certain that I "did anything wrong." The Q's looked "strong" into the close, and I view the losing trade here as a bad break on IBM and NOK comments.

The SPY/SPX trade? Obviously I was too bearish that afternoon of July 1st and after having seen an SPX rally back to match the June 17th high of 1,015, today gives me a chance to regroup and reassess. How sick would I be if MSFT has "blown away" earnings estimates like CAT and were faced with a gap up on the SPY? As sick, or at least as mad as I was today when the SPY ticked $99.13 took out my $99.12 stop as discussed in today's 11:00 AM EST update.

Market internals would be expected to be weak after a trade like today, but there was notable weakness found among NYSE listed stocks, especially in the category of new highs versus new lows.

While the S&P 500 Index (SPX.X) 981.73 -1.23% has both NYSE and NASDAQ listed stocks comprising the index, today's SPX close of 981.73 isn't too far from the July 1st relative low close of 982.32 and with matching 1,015 highs now found from mid-June and just recently on July 14th, we can perhaps begin to note that while there is still some bullish leadership being found in the new high/new low ratio, some benchmarking comparisons begins to show that some of the "momentum" of that bullish leadership among 1, 2 and 3-lettered NYSE listed stocks is starting to falter.

Market Internals -

The 45 new highs found in the NYSE isn't all that shocking on a day like today, but a more noticeable build is being found at the lows. I've boxed in green the dates of the recent matching highs in the SPX and boxed in red the July 1st close.

While the NH/NL Daily ratios for 06/17-6/18 were almost identical to the recent July 14th high in the SPX, there was a slight dropoff in the 10-day average of NH/NL. When comparing the July 1 relative low to today's internals the daily ratio is markedly different and there appears to be "momentum" toward weakness

I'm not just looking at the July 1st observation either. While hindsite is always 20/20, my bearish profile from July 1 may have been a mistake as it relates to the "gradual" rate of change found in the 10-day average leading up to that reversal low.

But I'm now noting on a comparison basis, the rate of change in the 10-day average, is notably "quicker" with today's trade.

I discuss the SPX "benchmarking" dates in relation to the NYSE tonight, only because we at least have an "equal high" type of benchmark to work from. The NASDAQ-100 Index has seen higher highs and isn't as amicable for such an exercise.

What I draw from the above, is that for the SPX and even the OEX, I'm now more "eager" to be looking for a rally point to short, most likely somewhere back in between current levels at the recent July high.

For the NASDAQ-100, I looked to play the Q's long in part on the thought that shorts/bears would be more eager to cover in the Q's and perhaps broader technology on a pullback. While the NYSE and NASDAQ are two different "markets," the growing number of new 52- week lows is sign to me that bears, even in stocks hitting new lows in a recently bullish market environment are beginning to be less aggressive in their short-covering with the thought that a rising tide will lift all boats. In essence, the tide may actually be falling and more boats are sinking.

It would be my opinion, that should the internals continue to deteriorate at the NYSE, it would be highly unlikely that the NASDAQ fair much better.

Having looked at the new/high new low breadth lets quickly review what, if any change was seen in the bullish % data.

Bullish % Table

Using same dates benchmarked from the new high/new low table, main observations are (from left to right), the NASDAQ-100 Index (NDX.X) achieved a higher high on price than 06/17-06/18 recently, but the bullish %, or number of stocks showing a PnF buy signal associated with the chart were fewer that in mid-June. This is "bearish divergence" and main reason I was playing QQQ bullish with thought that shorts would be willing to cover and provide greater support. The lesser number of buy signals compared to price action in the NDX itself is due to a narrower number of stocks providing the bulk of gains. This is not a good sign as breadth appears narrow.

The S&P 100 bullish % ($BPOEX) has shown internals confirming the recent move higher to July 14th. Most stocks are pulling their weight. Bullish % saw a net loss of 1 stock to a PnF sell signal today.

The broader S&P 500 Bullish % ($BPSPX) has shown similar "bearish divergence" to the NASDAQ-100 as it relates to the mid-June highs and recent July 14th highs. Not as notable as the NASDAQ-100, but about 3% lower on comparison. Comparing July 1 to today's trade, fewer stocks now showing a PnF buy signal as if demand isn't quite as broadly spread and supply taking over. Yesterday the bullish % fell 1.2% (6 stocks to sell signals) and today fell an additional 1.6% (8 stocks gave sell signals) and we sense some downside momentum from the internals, not unlike the new high/new low.

The very broad NYSE Bullish % ($BPNYA) slipped 0.62% today (roughly 18 new sell signals). No "bearish divergence" here when comparing to mid-June to mid-July benchmarks.

The very broad NASDAQ Composite Bullish % ($BPCOMPQ) slipped 0.89% (roughly 26 new sell signals). Similar to NYSE bullish %, no "bearish divergence" found as internals confirmed the recent highs.

The very narrow Dow Industrials Bullish % ($BPINDU) saw no change in its bullish % reading. This bullish % less-followed as it is so narrow and takes just 2 stocks to see a reversal higher or lower, but can give an "early" observation to strength/weakness on a reversal.

At the bottom of the above table, I footnoted a REVERSAL (rvrsl) bullish % that would have the appropriate index seeing a bullish % reversal lower, which takes a 6% reversal on 2% box scale to have the chart pulling back into a column of O. The "BEAR" footnote is a bullish % level needed to have that index reversing into either "bear alert" or "bear confirmed" status. The NASDAQ- 100 would "reverse" to bull correction status if a 74% reading were seen, while a 72% reading would be "bear confirmed."

In the past, I had colored the NASDAQ-100 Bullish % "red" from 81% to 79% when the bullish % reversed into "bull correction" status, then pink when it reversed back up to "bull confirmed."

S&P 500 Index Chart - Daily Interval

Bears still holding a short in the SPX will look for some momentum build to WEEKLY S2 of 973, but be cognizant of the intermediate-term 50-day SMA offering some correlative support at that level tomorrow.

After another plethora of earnings reports after the close of trading, I'll note that S&P futures (sp03u) settled at 980.80 and trade down 1.1 points at 979.70 here.

Early resistance tomorrow morning would be from DAILY Pivot of 984.78 and WEEKLY S1 of 985.75.

S&P 100 Index (OEX.X) Chart - Daily Interval

The OEX broke sharply below the lower-end of regression, but unlike July 1st, didn't manage a strong reversal by the close. With S&P futures rather calm early support is marked by today's low and WEEKLY 80.9% retracement of 493.11. With oscillators near-term bearish, bears might look for a bearish trade back near 498 or starting to round lower 21-day SMA of 499, with target back near the rising 50-day SMA.

Dow Industrials Chart - Daily Intervals

In percentage terms and even within the pivot levels, the Dow Industrials held up well. One note from CAT's big earnings surprise was how the weaker dollar helped drive sales and profits as the company said European block countries as well as Australia used their recent currency strength vs. the dollar to buy "big ticket" heavy equipment and inventory levels are now running thin. Recently, KO had been one of the "Three Stooges," but today's gains had it carrying a sword and joined two of the "Three Musketeers!" KO reported an 11% jump in Q2 profits and saw sales growth of 6%. Analysts viewed KO's results as positive considering weaker sales in Asia due to SARS.

NASDAQ-100 Index Tracking Stock - Daily Interval

Just a quick glance at the NASDAQ-100 Heatmap gives the NASDAQ- 100 trader an idea of how much impact IBM's comments and ESPECIALLY Nokia's (NOK) $14.40 -19.7% had on handset chipmakers. There could be more of that to come on a break below today's low. On a "dead cat bounce" tomorrow, I would look to short the QQQ back in the $31.58-$31.76 area, but Q's tend to be able to "overdo" things up and down and what bullishness remains in me would look to be a buyer back near $30.50 or as close to the base of regression as possible.

I "gambled" on the QQQ with a tight stop and couldn't have gotten much worse of a break from IBM and NOK. I'm not crying "would'a, could'a, should'a," but positive outlooks from either may have seen inverse result. I'm not sure where IBM got the name "Big Blue" but I feel a little blue in my QQQ trade after today.

Pivot Analysis Matrix

Jeff Bailey

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