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Technology weak in mixed session

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The tech-heavy NASDAQ-100 Index (NDX.X) 1,517.06 -0.65% was a weak spot in Wednesday's session as cautious forward guidance from networking giant Cisco Systems (NASDAQ:CSCO) $18.44 -6.63% and analysts downgrades of PC makers Dell Computer (NASDAQ:DELL) $36.85 -1.54% and Hewlett Packard (NYSE:HPQ) $18.97 -3.7% had technology bulls taking profits.

The Semiconductor Index (SOX.X) 405.76 -2.41 rivaled the Airline Index (XAL.X) 53.15 -3.22% for today's sector loser, where the SOX was dealt a blow after Morgan Stanley downgraded the chip- equipment space.

U.S. Market Watch - 11/10/04 Close

The U.S. Dollar Index (dx00y) 84.43 +0.16% edged higher, but saw a rather volatile session of trade. The recent weakness in the dollar helped narrow the trade deficit in September, as exports rose to a record $97.5 billion. After setting a record in August, imports fell to $149.0 billion from $150.2 billion, largely because oil imports were delayed due to recent hurricane activity in the Gulf of Mexico.

Financials held tough as the Federal Open Market Committee raised its target for fed funds by 25 basis points to 2.0%. In a related action, the Board of Governors unanimously approved a 25 basis point increase in the discount rate to 3%.

The Oil Service Index (OSX.X) 116.79 +2.62% recouped losses from Monday and Tuesday and looks set to test near-term simple moving average resistance.

Oil Service Index (OSX.X) Chart - Daily Intervals

I've found that commodity-related equities will often times lead and advance or decline, as the MARKET is able to sniff out the future just ahead of the commodity it trades on. While oil service stocks are a bit down the "food chain" is it relates to the commodity, where service stocks are more reliant on spending from the producers/explorers of fossil fuels, the OSX.X may be the "best" technical test for where oil prices are headed.

I went back and viewed the OSX.X daily intervals bar chart, and today's bounce from 113.00 has some significance to a then high found in May 2002. Back in 2002, the OSX looked very bullish, just as it does today. One "similarity" that I see, which provides an excellent technical test is the current 21-day and 50-day SMA positioning.

The PINK circles on the OSX.X chart mark very similar tests, where the OSX.X always managed to break back above the 21-day SMA. Will the near-term test show SIMILARITY to the prior three circles? If so, I'd have to think oil could be set for a rebound. However, if the OSX.X shows DIVERGENCE from recent past, but SIMILARITY to May 2002, then I think oil prices should stay below $50, if not head lower.

Today, December Crude Oil futures (cl04z) $48.86 +3.15% still settled below their RISING 50-day SMA ($48.79) and starting to curl LOWER 21-day SMA ($51.69).

Market Snapshot / Internals -

Stocks did trade their best levels of the session AFTER the FOMC announcement, but gave up those gains toward the close. While Treasuries did see selling, it wasn't "euphoric" by any means.

I marked today's closing yield on the 10-year bond ($TNX.X) at 4.254% as I wanted to check and see where this bond's yield was at the end of September, when the FOMC had raised rates 25 basis points.

In the October 17 "Ask the Analyst" column, the 10-year yield ($TNX.X) was at 4.119%, so it has risen 13.5 basis points, while the FOMC has now raised it fed funds target 25 basis points to 2.0%.

My observation here is that some investors are "fearful" that the weaker dollar is finding, or will find mass dumping of Treasuries by foreign governments that hold them. I don't see it.

I would also want to remind traders/investors that its not necessarily "bad" for Treasury yield to rise MODESTLY or GRADUALLY. It those sharp, aggressive runs (up and down) that spook markets and create the near-term uncertainty.

The 10-year yield ($TNX.X) finished just under its flattening to slightly trending lower 200-day SMA (42.73, or 4.273%). I still think equity bulls would like to see further selling, but at a MODERATE pace and have the benchmark bond's YIELD depict some "reflation" or some renewed growth characteristics. A rising 10- year and even 30-year yield also would need to be found as we see a greater amount of selling in the shorter-dated 5-year yield ($FVX.X), which has the yield curve flattening out. Equities tends to perform better with a steeper yield curve.

Pivot Matrix -

The SOX.X sees trade at WEEKLY S1 and closes below that level, and we can perhaps see the impact it had on the QQQ as it got pulled lower to just kiss its WEEKLY Pivot.

I sure wish I had "Max Pain" levels for this month, but the vendor's data feed is broken and its still not fixed. The bulk of open interest in the SOX.X was at 400 call (314 : 3,939), then 450 call (90 : 2,194) and 420 call (434 : 1,649) as of Tuesday's close. About the only remaining "Max Pain" I see for the month would be something back at 400.00, as the Nov. 420 calls still bid $10.00 per contract. My suspicion is that November "Max Pain" is somewhere around 415.

In this weekend's Ask the Analyst column and discussion on the Semiconductor HOLDRs (AMEX:SMH) $31.92 -2.64% (closed right on their WEEKLY S1), I've got to think that Cisco's (CSCO) cautious guidance and broker downgrade of chip-equipment stocks had every SMH Nov. $32.50 call holder jumping ship today.

If I get any "Max Pain" theory values from computerized source, I certainly let traders/investors know in an intra-day update or Market Monitor.

Jeff Bailey

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