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Market Wrap

Autumn, err, Fall

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      10-23-2001          High     Low     Volume Advance/Decline
DJIA     9340.08 - 36.95  9439.21  9300.37 1.31 bln   1522/1591
NASDAQ   1704.44 -  3.64  1739.47  1695.22 1.82 bln   1679/1913
S&P 100   559.05 -  3.47   566.89   557.02   Totals   3201/3504
S&P 500  1084.78 -  5.12  1098.99  1081.53             
RUS 2000  427.37 -  3.13   431.99   427.35
DJ TRANS 2261.99 + 58.41  2289.20  2202.85
VIX        33.19 +  0.08    33.82    32.25 
VXN        63.73 -  3.63    67.03    63.18
TRIN        1.19 
Put/Call    0.50

Autumn, err, Fall

Correction, it's Earnings Season. It was a day full of earnings reports. Where should I start?

Amazon.com (NASDAQ:AMZN) reported a 16 cent per share loss, which was in-line with what analysts had been expecting. But the company missed revenue estimates by about $10 million. It was a small miss, but enough to drive the stock lower by about 75 cents in the after hours session at the time of this writing. The company also reaffirmed that it would turn pro forma profitable in the fourth-quarter, but the overwhelming theme in its guidance was the fact that sales growth had slowed during the most recent quarter, which was what was reflected in the sell-off in after hours. The Internet Sector Index (INX.X) has been hanging tough recently, but Amazon's light sales number could pressure the index Wednesday morning. A breakdown in the INX.X below 110 could carry the index back down to the century mark.

AT&T (NYSE:T) reported third-quarter numbers that, for the most part, met expectations. But the company guided to expect further deterioration in revenues during the fourth-quarter due to extended weakness in its long-distance business. If AT&T is going to sell less during the fourth-quarter, then it's more likely to spend less, which is something to consider before jumping head first into any networking equipment shares. Along that line of thinking, it might be worth while to monitor the Networking Sector Index (NWX.X) Wednesday morning to see if the market shares my opinion.

The NWX.X finished fractionally higher Tuesday, but would've done better if it had not been for Lucent (NYSE:LU). The beat down equipment maker, after its massive write-down, reported a loss of 27 cents per share, wider than its 23 cent per share loss estimate. The company is making strides to clean up its balance sheet and getting back to profitability, but didn't offer much in bullish guidance for the immediate future. Shares finished almost four percent lower.

Haliburton (NYSE:HAL) reported bottom- and top-line numbers that met expectations. But the company remained relatively cautious going forward, which was similar to what ExxonMobil (NYSE:XOM) said earlier in the day. Still, the Oil Service Sector Index (OSX.X), of which Haliburton is a member, finished 1.36 percent higher Tuesday. The OSX.X has traded quite well over the past three sessions and could see some more upside Wednesday if the Haliburton numbers are received well.

Compaq (NYSE:CPQ) missed estimates by one penny by reporting a seven cent loss. But the company did report in-line revenue numbers. The stock headed a bit lower in the after hours on light trading. Mild weakness was also seen in shares of other box makers such as Dell (NASDAQ:DELL), but a lot of bad news had been discounted in Compaq, so its miss may be a moot point going forward. Anyway, DELL has already reaffirmed its quarter, which is set for release in a few weeks.

In the software sector, Citrix Systems (NASDAQ:CTXS) reported a pretty solid quarter, which came in ahead of estimates. The company is a sort of mini Microsoft (NASDAQ:MSFT), so as goes Softee so goes Citrix. The stock added about 40 cents in the evening session, so readers might want to watch the Software Sector Index (GSO.X) Wednesday morning as Citrix is a component of that index. For its part, the GSO.X pulled back late last week, but rebounded from the 140 level. A breakout above the 156 level could carry software shares, such as Citrix and Microsoft, higher.

Pharmacia's (NYSE:PHA) lowering of guidance knocked down drug shares. The company said that its profits would fall next year due to a slowdown in sales growth of Celebrex, the company's arthritis drug. Pharmacia lowered next year's profit estimates by about seven cents, but that was enough to take more than ten percent off the stock as shares slid by more than $4. A component of the Drug Sector Index (DRG.X), Pharmacia's warning pulled the index back from its breakout attempt Monday. The DRG.X had been holding up well relative to the market recently, so it remains to be seen if Pharmacia's warning was an isolated event, which is this trader's opinion.

Pullback or Push Higher?

At best, I'd label this week's earnings reports cloudy. The bar was lowered so much, especially by tech companies, in the preceding months that many companies have been able to stumble over their estimates. The question that has yet to be answered is whether or not third-quarter numbers will be the trough in this down cycle of corporate profits. It might be so for some companies, but I don't have the answer yet.

In the meantime, I'd like to point out a few developments across the major market averages this week. For a few weeks, I had been writing about the overbought nature of the averages as measured by Stochastics. Last Wednesday's reversal did a lot to work off the overbought status of the averages. Then, last Friday, the averages rebounded into the close then followed through in Monday's trading. That sequence of events caused a crossover to the upside in Stochastics across the Big Three averages: Dow, S&P, and Nasdaq. But Tuesday's reversal across the averages didn't offer any insight into short-term direction, which begs the question: Was the recent crossover in Stochastics on daily charts merely "noise."

I won't pretend to have the answer to that question. But I can set forth some levels to help find the answer in the coming days. In the S&P 500 (SPX.X), I'm still watching the 1085 area, which is a retracement level that I've been writing about for a while now. The 1085 level has been acting as price magnet of sorts, which continues to attract the SPX. If the SPX continues to find bids around 1085, then I think it has a shot at breaking above the 1100 level in the coming days, eventually working to relative highs. Any forthcoming breakout attempt above 1100 should have some staying power because the SPX has worked off its overbought nature as measured by daily Stochastics. Recall that last Wednesday morning the SPX tried to advance past 1100, but the buying pressure had been exhausted at that point, so there wasn't anybody left to carry to index higher. I can conclude that buying pressure was exhausted last Wednesday because Stochastics were so overbought.

If the SPX does attempt to breakout above 1100 in the coming days, I'll be watching for participation across several key sectors, including Bank (BKX.X), Tech (SOX.X, NWX.X, GHA.X), Energy (OSX.X, OIX.X), Retail (RLX.X), and Cyclical (CYC.X). If I don't see broad participation in a breakout attempt, I'm less convinced of the move.

To the downside, there aren't many near-term levels to reference in the SPX. The closest meaningful support level that I can find in the SPX is at 1050, which is more than 30 points away from Tuesday's close. Until that level is lost, I think we could see a lot of "noisy" trading in between levels.

The Dow Jones Industrial Average's ($INDU) technical set-up is pretty close to the S&P's. For its part, the INDU is churning around its 50 percent retracement level at 9250. Again, Tuesday's reversal didn't offer much insight into shorter-term direction. So I'll be watching for either a breakout above 9500 in the coming days, or a breakdown below 9100.

In the event of a breakout above 9500, I would confirm any such attempt with an advance past the 61.8 percent retracement level at 9525. If that is cleared on any rally attempt, then I think the INDU could work up around 9750 over the short-term. And like the S&P, I think that a breakout in the INDU can be pursued because there aren't as many buyers around as there were last Wednesday morning, which means demand could build on a breakout attempt.

To the downside, the INDU has some support at 9100. And if it doesn't breakout above 9500 in the coming days, it could grow top-heavy, which could lead to the re-test of 9100. Below 9100 sits the 9000 level, which is the BIG near-term support level that I'm monitoring.

The Nasdaq-100 (NDX.X) is in-between levels and more difficult to get a read on currently, at least for me. The NDX finished fractionally higher Tuesday, and there were many mixed signals within the NDX as measured by the randomness of its sectors, such as the Internets up 1 percent, while Chips and Biotechs finished lower by almost 1 percent each. Without the participation of the Semis (SOX.X) and Biotechs (BTK.X), the NDX.X will have a hard time advancing over the short-term. But if those two sectors rebound Wednesday, I'll be watcing for the NDX.X to advance back above 1400. From there, the two levels to monitor are 1420 and 1440, Tuesday's high and last Wednesday's high, respectively. Above those two levels lies the NDX.X's retracement level at 1460, which should serve as meaningful short-term resistance.

To the downside, the range between 1350 and 1360 could serve as support, but I tend to believe that those levels are more random than anything. The NDX's Bullish Percent chart just recently reversed into a column of 'Os' which hints towards profit taking in the index. For that reason, I'd prefer to be bullish on strong NDX stocks near support instead of chasing stocks higher near resistance. In other words, buying stocks near support makes more sense to me, if one were bullish on NDX components.

Tuesday's reversal offered little, if any, insight into future short-term direction. In fact, it went against the crossovers in the major market averages' Stochastics readings. One could argue that the continued anthrax fears was the reason for the reversal, while others might suggest that Tuesday's reversal was due to profit taking. Additionally, with the averages between major support and resistance levels, it's hard to have a lot of conviction either way. That's why in times of uncertain short-term price action it makes sense to do less in the form of trading smaller, which is what I've been doing so far this week.

What I'd like to see in the coming sessions is progress in either direction, up or down, I really don't care so long as the averages move. The worst kind of market is the one that does nothing because I'm an impatient person. And impatience generally leads to losses. Pick your spots and be tough.

Eric Utley
Option Investor

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