Bears Return with a Vengeance

Stocks fell broadly on Thursday, in the process taking out key support on the Dow, Nasdaq and S&P 500.

The ISDEX fell 31 to 744 and the Nasdaq dropped 127 to 3936, back below the 4000 level, finishing at the lows of the day. The Dow fell 121 to 10,376, in the process falling below the boundary of its bearish “diamond” chart pattern. The S&P 500 fell 26 to 1452. Volume rose to 1.01 billion shares on the NYSE and 1.63 billion on the Nasdaq. Decliners swamped advancers 18 to 9 on the Big Board and 24 to 15 on the Nasdaq.

Only 8 ISDEX issues finished higher on the day. [email protected] gave the ISDEX a needed boost, rising 2 to 20 15/16 on news that AT&T won its Portland open access case on appeal. Initial ruling had forced AT&T to open its cable lines to competing broadband access providers.

Sequoia Software soared 3 1/16 to 13 11/16 after Microsoft introduced its XML-based .NET generation of software. The two companies announced an alliance earlier this week.

Shares of Sonus Networks continued to soar, up 21 to 152 3/4.

Shares of Yahoo! led to the downside, falling 10 13/16 to 132, a day after a Lehman downgrade to Neutral. Merrill Lynch analyst Henry Blodget said he expects a good quarter from Yahoo!, but cautioned against expecting much upside due to Internet advertising weakness. Blodget recently issued a similar caution on eBay , off 3 9/16 to 58 3/16.

The stars continued to align for Red Hat , which gained 2 1/2 to 34 3/8 on news that Intel will use Linux software. VA Linux bolted 6 3/4 to 45.

Inktomi fell 6 1/4 to 141 1/16 after trading as high as 155 after the company announced the launch of search operations in Korea.

Shares of Webvan soared 1 23/32 to 8 1/4 on news that the firm is expected to beat expectations this quarter.

InfoSpace fell 2 1/4 to 55 15/16 after trading as high as 62 5/8 on news of a partnership with AT&T Wireless to develop and market the delivery of promotions and discounts to AT&T Digital PocketNet customers.

Kana Communications rose 7/8 to 57 1/2, down from an intraday high of 62 11/16, after Banc of America began coverage with a Buy rating and $77 target.

Shares of Lycos rose 5/16 to 54 5/16, down more than 5 points off its high, after being raised from Buy to Strong Buy by Chase H&Q. The merger with Terra Networks is expected to be completed this fall.

F5 Networks rose 3 1/16 to 49 3/4 after First Union began coverage with a Buy rating and positive comments on improved competitiveness. cratered 2 3/8 to 4 9/16 after Dain Rauscher Wessels downgraded the company to Neutral and said it could have problems meeting earnings expectations for the rest of the year.

Lightspan Partnership 1/8 to 5 11/16, down from an intraday high of 7 3/16, on news of a $2.5 million contract with the New York City Board of Education to provide online educational content in 551 schools.

Some technical comments on the market: As noted in the Midday Report, we could be forming rising wedges on the Nasdaq and S&P 500, a sign of a bear market rally that’s running out of steam. This afternoon, we fell to the lower boundary of the Nasdaq’s rising wedge, and broke through the lower boundary on the S&P: A sign that the primary trend could still be down. The Nasdaq turned back shy of its 50% retracement level (4087), topping out today and yesterday at 4073. The ISDEX is holding up well, but a break of 700 would tip the balance for Net stocks to the downside. A break of 800 to the upside would be bullish. However, the two most im

portant numbers to watch are 1480 on the S&P 500 and 10,382 on the Dow: the upper and lower boundaries, respectively, of their bearish diamond patterns. A clean break of either number should tell us a lot about the market’s direction. The Dow broke through 10,382 this afternoon, trading below 10,350 shortly before the close. This move could set up a test of the base of the Dow’s bearish descending triangle in the 10,200-10,300 range. A break of 10,200 would probably send us to about 9,500 on the Dow (the move predicted by the descending triangle), although a break of the diamond pattern would predict an ultimate downside of 8,400 or lower. A word on deciding when a pattern is broken: the rule of thumb is a close 3% beyond the boundary on rising volume. That means a close below 10,070 breaks the diamond and 9894 breaks the descending triangle. The lower boundary on the S&P’s diamond is 1370. If you’re going to short this market, set stops and be careful: if what we’ve had on the Nasdaq was a bear market rally, you know how powerful they can be. And finally, for those of you who still believe in Dow Theory, the oldest school of technical analysis, the Transports’ chart has broken down.

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