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Slow down, no reversal

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         05-16-2002        High      Low     Volume Advance/Decline
DJIA    10289.20 + 45.50 10318.80 10230.70 1237 mln   1419/1732
NASDAQ   1730.40 +  4.80  1734.71  1713.81 1437 mln   1568/1930
S&P 100   547.88 +  5.86   548.17   541.08   totals   2987/3662
S&P 500  1098.23 +  7.16  1099.29  1089.17
RUS 2000  507.40 -  6.14   513.10   506.02
DJ TRANS 2768.97 – 29.01  2805.18  2765.82
VIX        21.45 -  0.57    22.25    20.88
VIXN       44.52 -  0.34    45.42    44.20
Put/Call Ratio      0.86

Slow down, no reversal
by Leigh Stevens

The recent strong tech rebound, that had the Nasdaq up 7% in two back to back barn burner days this week, abated today as the tech sector managed a gain, but was struggling to keep in the plus column for parts of the day as profit taking set in.

Big gains in the blue chip stocks also were fewer, with the Dow only marginally higher. However, gins in the Dow today included SBC, which was up nearly 4%; General Electric (GE), +3.5%, Wal Mart (WMT), +2.8% and JP Morgan Chase (JPM) with a gain of 2.4%. Microsoft (MSFT) and Intel (INTC), gained on the day by between 1 and 2% and the two big-cap techs helped support the Nasdaq, which otherwise would have been lower on the day.

Providing a slightly negative backdrop was some soft economic data on the labor and housing markets.

This morning, the Commerce Department estimated housing starts of new single-family homes fell 2 percent to 1.27 million from 1.30 million. Consensus estimates were for starts to be higher. Construction of new housing units fell in April also, off about 5% to an annual rate of 1.56 million from 1.64 million. The housing report suggested some slowing from a very high building rate from early in the year - of course, weather was unusually mild then.

This morning's jobless claims number showed that jobless claims rose again last week by 2000. The advance figure for seasonally adjusted initial jobless claims for the week ending May 11 was 418,000, well above the 407,000 forecast.

Today, the Philadelphia Federal Reserve's monthly index fell to 9.1 in May from 12.3 in April, indicating a slowing down in improvement of the manufacturing sector in the Philadelphia region. Economists, the practitioners of the "dismal science", were expecting the index to rise above the prior month, to the 14 area. However, the context here is that the Philadelphia Fed index was below zero prior to 5 months ago, with each succeeding month since then, in plus territory.

These clues of a less than robust economic pickup provided some encouragement to the bears and a mild dose of disappointment to the bulls. However, the bulls seem to have their eyes firmly fixed on a hoped for time a few months out when strong business spending is the difference between 3% or 5% on GDP for some future quarter.

COMPANY/MARKET INFLUENCES -
Talk of market moving events ahead today was about Dell Computer (DELL) earnings due after the close. Dell was expected to announce slightly lower earnings than the prior quarter, but in line with estimates. The company has been optimistic about their chances of gaining some market share as a result of the Hewlett Packard/Compaq merger, so positive guidance was also expected.

While consumers have been holding up much of the economy throughout the recession and economic downturn, businesses have scaled back budgets for IT and other technology purchases as corporate profits have been hampered by falling sales and revenues. With signs of improvements in the economy, investors were clearly hoping that the corporate sector might be buying again, so Dell's numbers and ancillary information were due to be scrutinized for signs of any increase in business spending.

AFTER HOURS -
Dell Computer announced its earnings after the close and they beat the Street estimate slightly. Dell reported net income of $457 million, or 17 cents a share, on revenue of $8.066 billion. During the same quarter last year, net income was $462 million, or 17 cents a share, on revenue of $8.028 billion. Street expectations were 16 cents a share on revenue of 7.86 billion.

The all-important new holy grail, GUIDANCE on future earnings, was upbeat from Dell also. For Q2, Dell expects to earn 18 cents a share with improved (operating) margins - on revenue of $8.2 billion. On average, consensus estimates were for Q2 earnings of 17 cents a share, on revenue of $8 billion.

Dell's results generated a bit of a tech-buying spree in after hours trading Thursday, due to their increases in revenues and profits based partly on the strength of corporate sales. NDX (Nasdaq 100) added about 4 points initially. Dell's stock was about 1% higher. This bullish action should influence a firm opening tomorrow, absent any bearish news.

Agilent Technologies (A) reported a wider-than-expected second- quarter net loss, reversing gains pocketed a year ago, as revenues declined by nearly 40%. A also indicated it sees a Q3 operating loss of 10 to 20%. However the stock did not move much. Cisco Systems (CSCO) rose sharply, before falling back some in after hours trading as industry tracker Dell'Oro revealed that Cisco gained market share in almost every category in which it does business.

TRADING STRATEGY -
The market looks headed higher. I can find a lot of "reasons" why stocks should not go much higher, at least now. You know all the reasons that could or should work against any sizable bull move. However, technical action is bullish, buying is coming in and the other technical factors look bullish. Therefore, I assume the market is "right" in its outlook and former bearish influences are not going to be the key determinants of trend for now.

My anticipation has been that there would be a (downside) correction and more of a pullback here in the near-term, before another move higher. However, both Nasdaq and NYSE-related indices look like they may be consolidating their recent gains by just trading sideways for 1-3 days above recent near-support, in the area of some of the indices last hourly price peaks.

Key near-term support levels are:
SPX -1090; OEX -541; DJX -102; COMP -1700; NDX -1288; QQQ -32

If these hourly support levels are pierced or broken, follow through selling could then take the indexes back into the areas where I favor call purchases, around and in the chart gap areas:

SPX at 1080; OEX at 535; DJX at 101; QQQ at 31

If the foregoing declines don't happen - if say, it's the bulls turn to punish the bears! - getting into new positions may necessitate buying the indices if they exceed their implied breakout points:

SPX above 1100-1103 - objective to 1128; trend reverses at 1085
EX above 547 - objective to 563; reverses at 538
DJX above 103 - objective to 105.3; downside reversal at 100.3
COMP above 1736 stop - objective to 1785; trend reverses at 1683
NDX above 1325 - objective to 1376; reversal point at 1272
QQQ above 33.5 - objective to 35; trend reverses at 31.5

A breakout move assumes strong upside follow through after it occurs. If, instead there is a reversal, we need consider what levels would indicate possible downside reversals and these exit or reversal points are also indicated above.

CHARTS OF INTEREST -

At the juncture of what might be a major or intermediate trend reversal, it's important to examine the longer-term weekly charts for analysis of what is going on.

DJIA - Dow Jones Industrial Average ($INDU) - Weekly:

The Dow has clearly broken out to the upside from a well-defined weekly downtrend channel. This did not occur from an oversold level, according to the RSI (Relative Strength index). This is of less importance than watching for when the DJIA again moves into an overbought situation at the upper RSI line. 10,675, at the prior peak, would be the next major potential resistance.

The S&P 500 ($SPX.X) - Weekly:

The S&P 500 has some distance to go before a weekly closing high would clear the major downtrend line at 1125. The recent apparent weekly upside reversal, occurred after the Index completed an approximate 50% retracement of the last big advance. This is a common retracement amount before a countertrend move occurs. Above 1125, there is major resistance at the 1175 double top.

The Nasdaq 100 Tracking Stock (QQQ) - Weekly:

QQQ is just beginning a possible upside penetration of the long- term down trendline. The Q's need to close at or above 32.9-33 to achieve a decisive upside penetration of this line. Next key resistance then is at the 40-week moving average at 36.

Some of the shorter-term daily and hourly charts, with notations on the very near-term outlook can be found in my Index Trader sector.

SECTOR NEWS and EVENTS -
The Internet index ($INX.X) was the strongest gainer today, up 2.8%. Until today, much of the sector's rebound has most been due to the strong rally in Amazon (AMZN); today leadership in this group, was provided by Juniper Networks (JNPR), CNET Networks (JNPR) and Check Point Software (CHKP).

Showing that there is some level at which telecoms will be bought, the Telecoms Index (XTC.X) was up 2/3% mostly led by a gain in SBC Communications (SBC), after the No. 3 U.S. regional telephone company told analysts it was on track to meet its 2002 growth targets.

The Gold stocks, or the Gold and Silver sector index ($XAU.X) was an old familiar name on the top 3 performers, with a gain of 2%. The drug and biotech sectors were under sell pressure today, after rebounding some lately, after Pfizer (PFE) reported a pricing investigation. Also, IMClone Systems (IMCL) had bigger losses for the quarter than expected. NPS Pharmaceuticals (NPSP) fell sharply on a Merrill Lynch earnings downgrade. The stock is not part of the Pharmaceutical sector index, but had some influence in the sector as it was off 22%.

The Pharmaceutical Index ($DRG.X) fell about 1% and the Biotechnology Index (BTK.X) stocks took the biggest sector hit and closed 3.3% lower on the day.

Crude oil was off slightly today, with nearby crude oil futures closing just under $28, after a very volatile session, with an intraday high of 29.5. Bonds yields fell today, with the 5-year T-Note index ($FVX.X) declining 1.46%, to close at 4.52.

Leigh Stevens
Chief Market Strategist
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