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Market Wrap

Tech Slithers Higher

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      10-04-2001          High     Low     Volume Advance/Decline
DJIA     9060.88 - 62.90  9187.37  9045.38 1.53 bln   1493/1648	
NASDAQ   1597.31 + 16.50  1641.56  1581.08 1.73 bln   1380/2243
S&P 100   548.45 -  2.15   557.16   547.22   Totals   2873/3891
S&P 500  1069.62 -  2.66  1084.12  1067.82             
RUS 2000  417.04 +  3.82   420.57   413.22
DJ TRANS 2210.98 - 11.88  2238.43  2204.53
VIX        34.40 +  1.30    34.57    32.98 
VXN        61.94 -  0.23    63.98    60.47
TRIN        1.18 
Put/Call    0.46

Tech Slithers Higher

The Dow Jones Industrial Average ($INDU) and S&P 500 (SPX.X) curled lower Thursday, while the Nasdaq-100 (NDX.X) managed to post another positive day. Tech's gains came in spite of a decidedly negative jobless report.

The Labor Department reported Thursday morning that initial jobless claims rose to 528,000 in the week ended September 29, which was well above consensus estimates. While the broader market averages didn't immediately reflect the negative surprise, two sectors levered to the consumer did. Both the Retail Sector (RLX.X) and the Bank Sector (BKX.X) were among the poorest performing sectors in the broader market Thursday. The retailers were hit due to demand concerns and the banks were taken down due to credit concerns.

The BKX is especially critical to the broader market because it is the largest industry component of the S&P 500. And, the bank business is essentially the heartbeat of the economy. Perhaps the weakness in the BKX Thursday led to the rollover in the SPX during midday trading. For its part, the SPX stalled right at its retracement level that I highlighted in the Market Wrap Wednesday. (For those not yet convinced of the power of retracement brackets, I hope Thursday's rollover in the SPX added some credence to the tool.)

The SPX bumped up right against its retracement level around 1084 and proceeded to pullback. What's more, the SPX's Stochastics reading measurably crossed over during Thursday's session. With the SPX overbought in the short-term and near resistance, traders should be thinking about a few things concerning new positions and/or open positions. First, because the SPX failed to follow-through above its resistance level at 1084, it may portend a short-term pullback over the next few days. If the SPX does continue to weaken, led by the RLX and BKX, traders with open bullish positions should be thinking about sliding stops up to manage risk. After all, the SPX has had a heck of a run over the past two weeks and traders probably have some gains built up.

Second, because the SPX failed to follow-through above 1084, there may be some short-term bearish opportunities in some of the weaker stocks in the index. The reason bearish plays are appealing around current levels is because they can be managed quite easily with a mental stop in the SPX above 1084. However, the pullback in the SPX may be short in duration. And, traders seeking out bearish plays in the SPX should employ some relative strength techniques when searching for trades. It's a simple process: Look for the weakest sectors, then the weakest stocks within the sectors.

Because the SPX has had a substantial run over the past two weeks, it's difficult to intelligently discern short-term support. The SPX is quite a distance from its lower retracement level at 1012 currently, so traders might turn to whole numbers that are easy to relate to, such as 1060, 1050, or 1040 -- the latter of which was the SPX's intraday low Wednesday.

The SPX's technical position is similar to that of the INDU. Granted, the SPX is closer to its resistance, but the INDU is "in between" levels, too. Plus, the INDU's Stochastics also decidedly crossed over in overbought territory Thursday. Now, I appreciate that Stochastics is only one metric in a market of many, but the crossover in the INDU and SPX should have bullish traders on alert for potential downside.

Support in the INDU is a tough call, too. The 9000 level, for its easiness to relate to, may attract some buyers if the INDU drops to that level Friday. Below 9000, the INDU has some technical support between the 8800 and 8900 area.

On a side note, I should note that the INDU dropped about 100 points when the news hit the wires that a Russian airline went down over the Black Sea. I think that the market's reaction is important to note because it revealed that participants are still on edge and lent to the notion that further attacks, be they on America or any other country, could be met with further fear in the markets. I know that's obvious, but something worth thinking about.

Following the news of the downed airline, fears were mitigated by Dell's (NASDAQ:DELL) reaffirmation of guidance for the third-quarter. Company officials said earnings would fall between 15 to 16 cents per share, which is in-line with previous consensus estimates of 15 cents per share. Revenues are expected to come in around $7.3 billion, which is at the lower end of the previous range of $7.2 to $7.6 billion.

On the heels of Cisco's (NASDAQ:CSCO) comments Wednesday, Dell's comments added to the froth of tech shares in Thursday's session. But, like we witnessed Wednesday with the NDX bumping up against resistance at 1270, the tech-laden index once again paused at resistance Thursday. Yes, the NDX was able to advance past the 1270 level Thursday, but it was unable to advance past the 1310 area I highlighted as resistance in Wednesday's Market Wrap. The 1310 level is significant because that was the day high on September 17, which was the first day of trading following the terrorist attacks. I would speculate that 1310 is not only technically significant, but that it's also very psychologically significant due to the events surrounding the formation of that level.

Looking forward, a solid advance past 1310 could take the NDX up to 1365 over the short-term. But, the fact that the NDX closed back below the 1270 level Thursday may put any run on the 1310 level on the back burner. The weak close in the NDX has the index looking suspect to downside in Friday's session.

The late day fade we saw in the NDX, as well as the INDU and SPX, was most likely a combination of catalysts. First, the major market averages have had a decent run this week and part of Thursday's late day weakness may have been no more than routine profit taking. Second, the weak initial jobless claims number Thursday portends an equally weak jobless rate number Friday morning. The consensus is calling for a 5 percent unemployment rate. Third, traders may have been exiting bullish positions ahead of the weekend for fear of any further terrorist attacks and/or military conflict. And finally, there's the issue with earnings warnings in the after hours.

The earnings guidance was mixed late Thursday. Some companies had good things to say, such as Micromuse (NASDAQ:MUSE) and Starbucks (NASDAQ:SBUX). While others had bad things to say, like BMC Software (NYSE:BMC), Genentech (NYSE:DNA), and Gateway (NYSE:GTW).

The Gateway warning following Dell's reaffirming guidance was kind of interesting in my opinion. We heard of a similar dynamic with Cisco and Nortel (NYSE:NT) Wednesday. I wonder if Intel (NASDAQ:INTC) will be the next to reaffirm guidance then Advanced Micro (NYSE:AMD) warns again?

The warnings after the bell had little impact on the after hours trading session. SPX futures were slightly lower while NDX futures were slightly higher. Judging by the market's reaction to the jobless claims report Thursday morning, the unemployment report may or may not have a big impact on trading Friday.

The scenario I talked about in Wednesday's Market Wrap showed itself Thursday with the INDU and SPX pulling back, with the NDX out performing to the upside. I tend to believe that that will be the case again in Friday's session, and possibly over the very short-term into next week's trading. But, with the INDU and SPX already turning lower, I think it's only a matter of time before the NDX does the same. As I alluded to above, it may be time to look for short-term bearish trades in weak sectors of the S&P and moving up stops on bullish positions in the tech sector. But those ideas should only concern short-term traders, which I think is the majority of our readers. If I'm wrong let me know through the e-mail link below.

For those waiting on the sidelines for a big buy signal, I think that the best strategy is to wait for one or all three of the major market averages to go into bull confirmed mode on the point & figure front. I recognize that a lot of our readers are unfamiliar with the concept of bullish percent, but that's why I'm here, so I'll relay the buy signal once it's generated. In the meantime, make sure to read Thursday's Market Sentiment.

Eric Utley
Option Investor
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