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Quick To Cover

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        01-08-2001        High      Low     Volume Advance/Decline
DJIA    10621.30 - 40.70 10700.80 10516.00 1.10 bln   1613/1330
NASDAQ   2395.92 - 11.73  2397.06  2299.65 1.85 bln   1629/2224
S&P 100   677.31 -  4.36   680.76   667.28   totals   3242/3554
S&P 500  1295.86 -  2.49  1296.97  1276.29           47.7%/52.3%
RUS 2000  461.64 -  1.50   463.14   457.56
DJ TRANS 3142.03 + 28.04  3142.33  3083.17 
VIX        33.35 +  1.32    34.61    33.00
Put/Call Ratio      0.64

Quick To Cover

In a rare display of fear, the bears brought in their shorts this afternoon after driving the Nasdaq down 300+ points following the Fed surprise last week. And was it a coincidence the bears decided to cover their shorts as the Nasdaq Composite approached 2300? I don't think so.

After the Nasdaq Composite rolled over around the 2640 level last Thursday, and sank into the weekend during Friday's session, it wasn't a real big surprise the tech-heavy index gapped down this morning. Continued fears of slowing economic growth and its impact on corporate earnings kept most of the bulls at bay this morning and for the better part of the afternoon session for that matter. Add to the macro economic fears the usual bearish bliss from Wall Street's favorite weekend publication and its likely target Cisco Systems, and a morning sell-off was in the cards.

But what many market participants didn't foreshadow, especially the grouchy bears, was a nearly 100 point rebound in the Nasdaq Composite (COMPX) in the final hour of trading. What's more, it was encouraging to see that massive reversal take place from the 2300 level - a level which seems like it continues to attract buyers.

It's difficult to say whether or not the 2300 level is the low for the COMPX. We just don't know yet. And while we'd like to see that level continue to hold and attract buyers, we know the bears aren't going to go away without a fight. We learned that last week following the Fed's announcement.

But what we may have witnessed, after today's big rebound in the COMPX, is a sense of fear among the bears and their collective reluctance to press their luck. After all, the Fed is now on the side of the bulls and it's awful difficult to fight the Fed. But the bears will continue to point to the deteriorating fundamentals in the tech sector and the poor earnings reports expected for the fourth quarter of 2000, and the first quarter of 2001. But as we all know by now, the market has an uncanny ability to discount future events out by six or nine months. And with that argument, the bulls will point to better times ahead.

And the bulls argument might have gained some acceptance today among portfolio managers who are still sitting on the sidelines with plenty of cash to deploy. As I previously mentioned, the COMPX found buyers at the 2300 level today for the third time. The first buying binge at that level took place in late December and the second effort by the bulls was seen last week prior to the Fed's surprise. The Nasdaq's third bounce off 2300 this afternoon has many market participants suggesting the tech index has found a floor from which to begin the base building process. And although the COMPX still must contend with its nasty downtrend, it was definitely encouraging to see 2300 hold for the third time.

As you can see on the chart above, the COMPX will face resistance at the 2400 level before extending today's rebound. And if this afternoon's short-covering rally is similar to those we've witnessed over the past five months, the Nasdaq has a good shot at clearing 2400 early tomorrow. We've seen this pattern time and again where the shorts buy back their stock and the COMPX trades up towards the high end of its descending trend. And any upward move at this point might be exaggerated by fund managers who were enticed by the Nasdaq's ability to hold 2300 today. And if the short-covering/fund manager buying scenario plays out over the next two or three days, we're likely to witness big gains in the high-flyers on the Nasdaq as many of the four-letter darlings are trading near the low ends of their respective ranges, or oversold conditions. And if you do trade any of the Nasdaq high-flyers, it's imperative to use tight stops and have clearly defined exit points. On that note, if the COMPX does advance towards the upper part of its range, be very cognizant of resistance levels near 2500, 2560, 2600 and 2640 as detailed on the chart above. But any bull must remember that the Nasdaq is still in a descending trend, made clear with the chart below.

Away from the Nasdaq and tech sector, the Dow Jones Industrial Average (INDU) had problems of its own this morning. Continued concerns over the economy along with credit problems among major banks weighed on the blue chip index as Monday's session wore on. The rumors revolving around Bank of America last Friday, and the potential for bad loans on its books continued to hamper the broader finance sector today, despite the friendlier ways of the Fed. But, the same shorts who were scared into covering on the Nasdaq also bought stock back in the listed names, which gave the INDU a nice lift into the close of trading. After the INDU's head-fake above the 11,000 level following the Fed's announcement last week, the blue chip index has fallen back into its trading range between the 10,500 and 11,000 levels. Similar to the Nasdaq's bounce, the INUD's rebound off the key 10,500 level was encouraging to witness and may portend an advance back towards 11,000 barring any major blowups from the bank sector. Here again, it may pay to ease into some blue chip favorites as the INDU is oversold and may be due for a pop in the coming days. As is the case in the Nasdaq, many INDU components are trading near oversold conditions or have pulled back near key support levels such as General Electric, Citigroup, United Technologies, American Express, Home Depot and International Paper, among others. Those names are by no means a buy recommendation, but traders should be aware of their deeply oversold conditions and the possibility for a bounce in the next two or three days.

After suffering three consecutive sessions of selling off, the major market averages may very well be due for a lift in the coming sessions. However, my usual mantra of remaining disciplined with sound money management and tight stops holds true even after today's impressive rebound in both the INDU and COMPX. If we do see any extension of this afternoon's short-covering early tomorrow, we may see the fund managers ease back into the market and add credence to the thesis of the Nasdaq finding a floor near the 2300 level. Any upside moves in the coming sessions in either the INDU or COMPX can be traded as long as discipline holds.

Along with the oversold conditions in the broader market, there are two other factors to mention this evening, which may or may not add to the possibility of an extended advance. There are several technology conferences taking place this week where companies are letting analysts know how their business is doing in the slowing economy. Both Salomon Smith Barney and Morgan Stanley are holding tech conferences this week, with major players attending each. These conferences can be tricky to game as both good and bad news can freely flow. If the tech companies at these conferences please the analysts and refute the fears of lower earnings estimates, we may soon hear the sell-side of Wall Street reiterate buy ratings and raise earnings estimates. On the other hand, if the tech attendees to these conferences confirm the market's worst fears, we may see a retest of recent lows, which is all the more reason to stay disciplined.

The second item to be aware of this evening revolves around two pre-announcements after the bell. But unlike the recent warnings we've witnessed, two well-know tech stars actually pre-announced good news after the bell this evening. Amazon.com said its sales for the holiday period totaled $960 million, which were short of the $1 billion goal, but within the range of estimates. The other major positive announcement came from I2 Technologies, who said it expected to beat analyst estimates for earnings and revenues in the fourth-quarter. Shares of Amazon closed the regular session at $14.94 and traded above $15 in after hours action. And shares of I2 closed the regular session at $41.94 and settled around $46.50 in after hours trading. In light of the positive news from I2, the bulls might want to watch the B2B sector tomorrow for signs of extended short covering.

The positive news from the two aforementioned tech companies gave a nice lift to the Nasdaq futures, which were up about 30 points at time of writing. If the Nasdaq futures are a sign of things to come early tomorrow, the bears might feel a little bit more pain and be forced to buy back more stock en route to sending the market higher.

Eric Utley
Assistant Editor

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