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Merger Monday As The Biotechs Lead The Charge

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        12-17-2001        High      Low     Volume Advance/Decline
DJIA     9892.00 + 80.90  9930.90  9798.80 1.24 bln   1783/1368	
NASDAQ   1987.40 + 34.30  1994.48  1951.45 1.80 bln   2077/1594
S&P 100   578.97 +  6.59   580.69   571.86   totals   3850/3962
S&P 500  1134.36 + 11.29  1137.36  1122.34           
RUS 2000  479.94 +  8.65   479.94   470.73
DJ TRANS 2619.06 + 41.96  2619.88  2576.37
VIX        25.43 -  0.54    26.45    24.83
Put/Call Ratio      0.56

Merger Monday As The Biotechs Lead The Charge

Rumors became news today when Amgen (NASDAQ:AMGN) announced that they would buy Immunex (NASDAQ:IMNX) for $16 billion in cash and stock in the largest-ever biotechnology merger. The deal, expected to close in the second half of next year, will create a $72 billion biotech behemoth with added research strength and the financial muscle to buy late-stage development drugs from competitors. Unlike the PC business, this is an industry where size DOES matter.

The big question that seemed to be making the rounds was whether AMGN was paying too much to acquire that size. Whatever side of the argument you come down on, there is no denying that the deal was a market mover today. At the closing bell, AMGN was up more than 6% (recapturing most of its losses from Friday), while IMNX vaulted higher by 13.4%, bringing its 3-day gain to nearly 19%. The Biotechnology sector (BTK.X) benefited nicely from the action as well, picking up more than 4% and just inching above the $585 resistance level.

So, is this the beginning of a renewed rally in the sector, or is it a one-day merger related bounce? Looking at the daily chart of the BTK, I'd have to say it has the earmarks of a solid move higher.

While the AMGN/IMNX merger definitely stole the show on Monday, there were plenty of other mergers to keep the news hounds busy. Vivendi (NYSE:V) announced an agreement to purchase USA Networks (NASDAQ:USAI) for $10.5 billion. Alpha Industries (NASDAQ:AHAA) and Conexant (NASDAQ:CNXT) agreed to combine their wireless businesses. Finally, Carnival Corp's (NYSE:CCL) $4.5 billion hostile counter-bid for P&O Princess (NYSE:POC) was rebuffed, which sets the stage for a bidding war with Royal Caribbean (NYSE:RCL). Who says that Mondays are slow news days?

Oh, and I almost forgot. As if having triple-witching expiration this Friday weren't enough to keep things hopping this week, we have the Nasdaq-100 shuffle taking place, effective next Monday, December 24th. The NASDAQ-100 (the basis of the popular QQQ tracking stock) is re-ranked every year at this time and is based on the number of shares outstanding and the current stock price.

In addition, the following 13 issues will be added to the Nasdaq-100 Index: ImClone Systems Incorporated (NASDAQ:IMCL), Charter Communications, Inc. (NASDAQ:CHTR), CDW Computer Centers, Inc. (NASDAQ:CDWC), Symantec Corporation (NASDAQ:SYMC), Sepracor Inc. (NASDAQ:SEPR), Invitrogen Corporation (NASDAQ:IVGN), Express Scripts, Inc. (NASDAQ:ESRX), Cephalon, Inc. (NASDAQ:CEPH), ICOS Corporation (NASDAQ:ICOS), Cytyc Corporation (NASDAQ:CYTC), Protein Design Labs, Inc. (NASDAQ:PDLI), Integrated Device Technology, Inc. (NASDAQ:IDTI) and Synopsys, Inc. (NASDAQ:SNPS).

Needless to say, the combined effect of reshuffling the NASDAQ-100 and triple-witching expiration could create some interesting market dynamics as we count down towards the weekend.

Away from the irregular events, there was some decent action in Semiconductors (SOX.X:+2.7%), Software (GSO.X:+2.56%) and Telecom (XTC.X:+2.28%) leading the NASDAQ Composite to a 34-point gain. Proving that the bulls are not going to give up this fight easily, the COMPX managed to bounce right at its 200-dma (1935) (dark grey line) on Friday and then push through both the 20-dma (1955) and the 62% retracement (1963) of the decline from the May highs to the September lows. And look at that ascending trendline. The 20-dma (thin red line) is almost indistinguishable from it, as both have provided support for the past 3 months.

But there is an interesting divergence occurring here. While it is difficult to see on this chart, the 20-dma is flattening out due to the recent pullback, while the trendline has continued on its steady rise. Monday's action brought the COMPX right back to this trendline. The $64k question is whether it will once again be utilized as support, or if it is changing to resistance. Judging by the bullish turn in Stochastics, we'll get one more run higher before that answer is known.

The DJIA is at an interesting crossroads as well, currently vacillating between heavy resistance in the 10,150 area (also the site of its 62% retracement and the 200-dma), but holding above the 9700 support level. While Stochastics are favoring another rally this week, this is another battle that is likely to see the first casualties start to fall shortly after the first of the year. If you want to play the upside in the DJIA, keep your eye on IBM and GE. IBM has been particularly strong lately, recently breaking out to new 52-week highs. It is unlikely that the DJIA will be able to crack overhead resistance without IBM's participation. GE is frequently viewed as a proxy for the direction of the Dow due to its exposure to a broad spectrum of industries. Recall, that GE reached its apex and began to fall back towards support ($36) about a week ahead of the rollover in the DJIA. Could it be that the rally in GE that has been getting under way over the past 2 days is hinting towards another rally attempt in the Industrials?

I don't have the answer, but it is another developing pattern that bears close observation as we head into the end of another year. There is no doubt that trading opportunities will emerge between now and the end of the year, as well as throughout the next year. Trade the end of the year if you can give the endeavor your full attention. Otherwise, you may want to follow the lead of professional traders in taking some much needed R&R time to spend with your family. I know I will. After all, if there is one lesson we all should have learned over the past 2 years, it is always easier to find another opportunity then recreate trading capital.

Until the markets give us a strong signal one way or the other, I think Jim's entry targets of 9800/1950/1125 (for the DJIA/COMPX/SPX) are as good a trade filter as any. Stay long above those levels and go flat or short below.

Have a profitable week!

Mark Phillips
Research Analyst

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