Nurse, Please Pass the Tourniquet
Monday's disconcerting settlement of the Nasdaq Composite (COMPX) marked the seventh consecutive session it finished lower. But, news from one of the Nasdaq's big caps after the bell may stop the bleeding.
Software giant Oracle (NASDAQ:ORCL) reported its fiscal fourth- quarter numbers after the bell. The company earned 15 cents per share, while consensus estimates had Oracle pegged to earn 14 cents per share. Although the company did report revenue figures that were a little light, its better-than-expected earnings per share number appeased buyers in the after hours trading session, who carried shares over $1.25 higher from their 4:00 p.m. EST close.
Along with the besting of earnings estimates, Oracle officials provided guidance that, in their own words, was "cautiously optimistic." On several occasions during their conference call, Oracle officials opined that the worst may be over and that the business environment, at least in the U.S., is improving. The remarks made by Oracle's officials - aka guidance - were the types of comments we need to hear from technology companies.
However, the guidance offered by Oracle officials after the bell Monday was in stark contrast to what Level 3 Communications' (NASDAQ:LVLT) officials said before the bell. The telecom company revised its projections lower for the remainder of 2001 and also for 2002. From Level 3's news, the selling momentum in the tech/telecom space, which was sparked by Juniper Networks (NASDAQ:JNPR) two weeks ago and fueled by JDS Uniphase (NASDAQ:JDSU) and Nortel (NYSE:NT) last week, drove shares within the space lower Monday.
The continued weakness in the tech/telecom complex finally dragged the COMPX down below the psychologically significant 2000 level Monday on a settlement basis. The COMPX's close below 2000 is its first since April 17th.
Concerning the COMPX, there are several strategies to consider over the short-term. After its close below the 2000 level Monday, my initial stance would've been to short weak technology stocks during Tuesday's session. But, judging by the market's reaction to Oracle's earnings report after the bell, we may witness a short covering rally during Tuesday's session, which is long overdue.
Sentiment has grown pretty negative in the tech sector and the COMPX has finished lower for seven consecutive sessions. No market nor stock goes down in a straight line, so a relief rally is to be expected. Obviously, the magnitude and duration of any relief rally are the variables to consider. And whether or not readers choose to game any advance is a matter of time frame and risk tolerance. But, keep in mind that the COMPX has some resistance around the 2060 level, which is a significant retracement level. After 2060, the COMPX faces even more significant resistance at 2100. So if readers choose to trade any advance over the next several sessions, keep those two levels in mind.
On the downside, the COMPX has support right around the 1975 level, which is another significant retracement level and was roughly 10 points away from the COMPX's intraday low Monday. If the COMPX loses the 1975 support level, we may start looking for the COMPX to hit its bearish price objective generated by its head-and-shoulders, which lies around the 1875 level.
But, similar to the Oracle development after the bell Monday, I noticed an equally positive development on the point & figure charts. The Bullish Percent for the Nasdaq-100 remained unchanged Monday from its close Friday at 26 percent. What that tells us is that even though the Nasdaq finished lower Monday, the internals of the Nasdaq-100 didn't get any worse. We can deduce from this development that perhaps the heavy selling that has pressured the Nasdaq over the last seven sessions may have subsided Monday, which adds credence to the possibility of a relief rally over the coming sessions.
Away from the tech sector, the price action in the Dow Jones Industrial Average (INDU) was more encouraging. The Dow did attract buyers from the opening bell, who carried the blue chip index as high as 10,709 before it pulled back. Remember last week we addressed the seemingly significant 10,700 level, specifically its potential to act as a price magnet. Also recall that the Dow traded as high as 10,716 last Friday, before pulling back. So it would seem in the short-term that 10,700 may act as resistance.
In terms of support, the Dow has help at the 10,500 level, which is significant for both psychological and technical reasons. If the Dow does fall to 10,500 for whatever reason this week, it may attract dip buyers and offer traders a relatively low-risk entry point into some strong blue chip names. However, a break below 10,500 would be most disconcerting and, conversely, would offer some shorting opportunities for traders.
The S&P 500 (SPX.X) slipped ever-closer to our significant support level at 1200 Monday. We need to see this level hold if the broader market is going to mount any sustained advance over the coming sessions. Otherwise, a breakdown below this level in the SPX could adversely impact the broader market, including the Dow and Nasdaq.
Last week's trading, which somewhat spilled over into Monday's session, is certainly difficult to stomach, especially for those who were expecting an economic recovery during the early part of the second-half of the year. And judging by the recent slew of earnings warnings, especially in the tech/ telecom space, the recovery might be pushed out to late 2001 or early 2002.
However, we need to keep in mind that the Fed's first interest rate cut, way back on January 3rd, is just beginning to filter through the U.S. economy. And there are many more rate cuts in the pipeline that have yet to work through the economy. Further, if history is any guide, we may be currently witnessing the darkest period of this particular contraction in the economy before the eventual rebound. As Jim has written in the past, "It's always darkest before dawn."
The past week of price action in the stock market may have been simply a re-adjustment to the view that the economy would not rebound until later 2001, thus a pushback in the rebound of corporate profits. Instead of the Nasdaq breaking out above the 2250 resistance level two weeks ago, the further deterioration in fundamentals begged a pullback. But, we must also keep in mind that we have heard of anecdotal improvements in certain segments of the market, such as Applied Materials' (NASDAQ:AMAT) guidance and Xilinx's (NASDAQ:XLNX) hint of a bottom not too long ago, in addition to Oracle's comments Monday evening. A likely scenario is that the broader market averages pullback a bit further before basing and eventually turning higher in anticipation of a sustained rebound in the economy and corporate profits.
While there may be a bit more blood loss this summer, my sense is that there's a period of healthy recovery in the not too distant future.