RealTime IT News

Bulls Take A Breather

Stocks took the day off Friday after two days of strong gains.

The ISDEX http://www.wsrn.com/apps/ISDEX/ fell 2 to 174, and the Nasdaq lost 22 to 1911. The S&P 500 fell 8 to 1122, and the Dow gave back 12 to 9907. Volume declined to 1.38 billion shares on the NYSE, and 1.71 billion on the Nasdaq. Decliners led by 16 to 14 on the NYSE, and 19 to 15 on the Nasdaq.

TMP fell 10% on accounting concerns.

Adobe surged 6% on a bullish outlook.

Computer Sciences gained 4% after beating estimates, but MicroStrategy lost 10% on its results.

Sun lost 3% on market share concerns, and briefly dipped back below $10.

Ciena and Oracle fell 5% on downgrades.

Micron gained 3% on bullish analyst comments.

Some technical comments on the market: Note: To see the charts in the text email newsletter, click on the internetstockreport.com story link at the top of the newsletter.

We're going to focus on the big picture tonight, and in one index only: the S&P 500. A couple of indexes have potential broadening tops in them, the Dow among them, but the clearest belongs to the S&P (see first chart below). An orthodox broadening top is a series of three higher highs and two lowers lows, with no more than two months between each reversal point. The pattern is almost always bearish, because the out-of-control conditions it takes to form them tend to occur only at tops, and they also tend to occur only at the end of long bull markets, as Edwards and Magee noted in their seminal work Technical Analysis of Stock Trends in 1948. Calculating a downside target for the pattern is simple: the minimum expected decline is from the peak (5) to the trough (4) below the trough. That target would be 1051 on the S&P, since the pattern stretches from 1114 (4) to 1177 (5). However, the ensuing decline often exceeds the minimum target by a substantial margin. Microsoft (second chart below) had exceeded its minimum downside target even before the September 11 terrorist attacks. The other interesting thing to note is how clearly the S&P is following the pattern. When a broadening top breaks (when it went below 1114 in this case), it often rallies back into the pattern before turning back down in earnest. According to Edwards and Magee, a post-breakdown pullback retracing from one-half to two-thirds of the initial decline (from 1177 to 1081 in this case) "will be attempted, according to our experience, in at least four out of five Broadening Top Patterns." The S&P closed almost exactly at the half-way mark (1130) yesterday. Given the complacent sentiment readings over the last few weeks, it seems likely that the market should begin a substantial decline soon, perhaps after a few more days of consolidation. The move down should begin on the next close below 1114. The 1132-1140 level is very tough resistance. 1140 also marks the 62% retracement of the 1177-1081 decline, and is also an area of significant chart resistance and the 50-day moving average.

Special report: For a free introduction to technical chart patterns, visit http://www.internetstockreport.com/guest/article/0,1785,2571_500051,00.html.