Option Investor
Market Wrap

Back to back record gains wipes out Friday's loss.

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       4-18-2000           High     Low     Volume Advance Decline
DOW    10767.40 + 184.90 10773.90 10571.30 1,093,776k 1,975  1,009
Nasdaq 3,793.57 + 254.41  3794.97  3563.83 2,151,278k 3,271  1,055
S&P-100  785.92 +  30.55   785.92   761.84    Totals  5,246  2,064
S&P-500 1441.61 +  44.13  1441.61  1397.81            71.8%  28.2%
$RUT     486.09 +  26.83   486.09   459.26
$TRAN   2769.53 +  90.95  2771.77  2673.49
VIX       29.37 -   2.82    31.34    29.20
Put/Call Ratio       .65

Back to back record gains wipes out Friday's loss.

Just another normal day on the Nasdaq. Record gains following record losses, etc, etc, etc. Fortunately the back to back record gains are a lot easier to take than the three days of the top three losses from last week. With the bears still going from interview to interview in the media you would think that this is a perfectly constructed bear trap rally. Could it be? Don't count them out just yet.

The Dow was the laggard today as the Nasdaq rallied from the -35% lows from last week. The Dow however may be about done for the current rally. As more and more Dow components announce earnings and the reason for the rally subsides the Dow will have a much harder time recovering the high ground. For instance IBM and INTC announced today and missed the whisper numbers.

The Nasdaq is rapidly approaching the first real test for the current rebound. Closing today at 3790, only +15 points above the days upper resistance on end of day momentum only, the index will encounter real resistance at 3800-3900. Buyers tomorrow will have to fight profit taking and immediate resistance.

The Nasdaq scored a several records today. The largest single day point gain ever at +254, eclipsing yesterdays biggest one day point gain ever of +218. This was the first time ever that the Nasdaq posted two +200 point gain days back to back and only two days since the largest ond day point drop ever. Volatility is still the name of the game. The challenge here will be maintaining the current momentum. Even after the huge drops the +450 point two day gain is a sure target for profit taking. We have rebounded +14.2% in two days and that exceeds the +10.8% two day rebound from the Oct-1987 crash. After that rebound the Nasdaq headed down again and retested the lows again several weeks later. Almost all the analysts have avoided calling Friday the bottom and most are expecting the Nasdaq to head back down again. The next two days will be the real test as we enter resistance from above and natural profit taking before the long holiday weekend.

Four of the big boys announced earnings after the close today with mixed results. IBM announced $.83 vs estimates of $.78 but below the whisper number of $.84. IBM also announced a -5% drop in revenue from the Y2K impact but said future quarters would be strong. Still the stock got hammered in after hours trading for -3.63 as details of the lower revenue became public. Intel also announced and beat the street estimates of $.69 with a $.71 actual but also missed the whisper number of $.73. Intel split the revenue range expected and said business was good but an easing of the chip shortage could occur in coming quarters and warned that margins could suffer as AMD and Intel battle is out on the front lines. INTC was down -4.50 in after hours trading. Those two stocks alone will account for a significant drop in the Dow at the open if this sentiment carries forward into Wednesday.

AOL also announced earnings and beat the estimates of +.09 with a +$.11. The whisper number was also $.09. AOL managed to beat the revenue numbers and the new subscriber numbers but still traded down initially but rallied back to close flat in after hours.

QCOM was the big winner in the after hours earnings parade. Announcing +$.26 they beat estimates of $.24 and matched the whisper number of $.26 as well. However, "it is all in the call" and the conference call was very upbeat and positive with a strong forecast for coming quarters and upbeat comments about the new product mix. Revenues were down substantially from estimates of $1.1 bln to the $717 mln they actually posted. However the street did not seem to care and QCOM was up +8.00 in after hours trading.

Lets see if I understand this. AOL beat all the estimates including revenue and hit the whisper number and traded down to flat. QCOM hit the estimates and the whisper number but missed revenues by -34% and traded up +$8.00. This is why sentiment is so important and also why you should never hold over an earnings announcement. Had you owned IBM, INTC, AOL and QCOM, four big names, the odds of losing money at the open tomorrow are very good. -$3.63 on IBM, -$4.50 on INTC, flat on AOL but probably down at the open on lack of interest and up +$8.00 on QCOM if it holds. Not a pretty picture.

With Thursday being option expiration day this month this week would normally have an upward bias but after the big bounce it would be impossible to predict which way the bias might be leaning. Ralph Block said on CNBC this afternoon that there has not been a major sell off after a TRIN spike, like I reported on Sunday, since records were kept beginning in 1962. That does not mean we will not retest the 3300 level again before moving upward. There were 13 occurrences of just such a spike and none had a meaningful drop below that bottom in the weeks following.

Now a contrarian indicator would be Ralph Acompora who was quoted today as calling for Nasdaq 2900 as a retest low. While I do not agree with him he has been right before. Lately however he has been late to the party and not exactly in top form. Several people emailed me today and commented that "if Ralph is saying 2900 now, Friday was the bottom."

I would have to say that the rally is convincing on the surface with NYSE advancers beating decliners 2:1 and Nasdaq advancers beating 3:1. Second tier stocks on the Nasdaq finally joined the action today after the big cap rally on Monday. Volume was decent as well with over 1 bln on the NYSE and 2 bln on the Nasdaq. Still I am cautious. I see it and I want to believe but I keep looking over my shoulder expecting Freddy Kruger to be coming through the door. Historically the Nasdaq has been down the last half of April. However the day before Good Friday is typically up as well as the last three days of the month. These small trends can easily be flattened by the major moves we have been seeing.

So lets recap. We were blindsided by a lower retest of the April 4th low. We were told we would have to retest that low. WHAM! Now we have a significantly lower low and they are telling us we will have to retest that lower low. Retests normally occur within one-to-five weeks. Earnings are here and traders will either sell before for a profit or after for a loss, but they will sell. The last half of April is normally down. Tax contributions cease this week. Liquidity is in question. Yes, everything looks like it is bargain priced but didn't it look that way last week also? And the week before?

Quiz: What pattern is characterized by continuing lower lows and lower highs? A down trend! This is what the Nasdaq looks like now. Until we break out of this pattern with a close over 4000 to start and over 4400 to confirm then we are still going down. We all want to look at the chart and see a rally in progress. It is human nature. We ignore the negative because we are focusing on the positives. Since March 10th we have been in a solid down trend of a week down followed by 2-3 up days. We have to break this trend this week or repeat the process again next week. We had our two free up days and everything we get from this point forward we are going to have to work for. The Dow will take a shot at the open in the morning from IBM and INTC and that could set the tone for the day. The Nasdaq closed at its high and could easily continue the rally effort. I would be very cautious of any roll over on the Nasdaq after the open. Everyone will be watching and any sign of weakness will evoke the flight response from the thousands of traders that got burned in the last two weeks. Remember, the Fed is still in our future and although I do not expect it there are those who are calling for a +.50% rate hike and that would be a killer.

I went flat at the start of the roll over this afternoon and I am going to watch from the sidelines until next week.

Trade smart and protect your profits.

Jim Brown

Current long position: none

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