Early Rally Fades

Stocks ended the day modestly higher on Wednesday after a strong rally gave way to profit-taking. Corning fell after hours on cautionary comments.

The ISDEX http://www.wsrn.com/apps/ISDEX/ rose 14 to 454, and the Nasdaq added 18 to 2859. The S&P 500 added 3 to 1364, and the Dow slipped 3 to 10,646. Volume rose to 1.3 billion shares on the NYSE, and 2.55 billion on the Nasdaq. Advancers led by a handful of issues on the NYSE, and 20 to 17 on the Nasdaq. Fed Chairman Alan Greenspan testifies on Capitol Hill tomorrow morning, less than a week before the Fed’s next meeting. For earnings reports, visit our earnings calendar at http://www.wsrn.com/apps/earnings/internet.xpl and reported earnings at http://www.wsrn.com/apps/earnings/ireported.xpl. For after hours quotes and news, visit our after hours trading site at http://www.afterhourstrading.com.

Corning fell 4 to 66 after hours after blowing away estimates by 6 cents with 34-cent earnings, but issuing cautious forward guidance. Akamai , VeriSign and Exodus also traded lower after hours despite beating estimates. E*Trade was unchanged after beating estimates by a penny, while Kana plunged 2 1/2 to 7 after missing estimates by 17 cents with a 37-cent loss.

During the day, Broadcom traded as high as 139 1/2 after beating estimates by a penny with 32-cent earnings, and revenues of $376 million topped estimates of $370 million. But Robertson Stephens raised concerns about the sustainability of the company’s growth-through-acquisition strategy, sending the stock down 8 11/16 to 124 3/4.

Siebel Systems rose 1 to 79 1/4 on earnings of 20 cents, a nickel ahead of estimates. Compaq surged 2.35 to 22.40 after beating estimates by 2 cents with 30-cent earnings.

Digital River soared 1 7/16 to 8 15/16 after beating estimates by 10 cents with an 11-cent loss. WebTrends tacked on 1 3/16 to 34 15/16 after beating estimates by a penny with 11-cent earnings. Resonate slipped 7/32 to 4 5/8 after the company’s 25-cent loss beat by a penny.

1-800-Flowers.com slipped 3/16 to 5 1/2 after beating by 3 cents with a 16-cent loss. Avanex plunged 16 11/16 to 65 3/16 after topping estimates but failing to raise forward guidance.

InterNAP lost 1 9/16 to 8 7/16 after matching estimates with a 41-cent loss. Delano Technology slipped 5/16 to 4 3/16 after the company’s 35-cent loss met estimates. New Era of Networks added 11/16 to 5 3/8 after beating estimates by a penny with a 34-cent loss.

FVC.com missed by 5 cents with a 35-cent loss, and the stock dropped 13/32 to 2. CyberSource lost 1/4 to 2 3/4 after bettering estimates by a penny with a 44-cent loss.

RealNetworks fell 1 to 11 1/16 after Merrill Lynch issued a Neutral rating and said Microsoft could do to RNWK what it did to Netscape.

iManage rose 29/32 to 7 9/32 on a deal with Cisco . Portal Software soared 3 9/32 to 11 13/16 on a deal with privately-held TellMe Networks and news that it could win a contract from AOL Time Warner .

Netopia , up 13/16 to 9, will be acquired by Proxim .

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The Nasdaq turned back today after running into its smaller rising channel broken Monday (the red line). While that is a negative, it’s interesting to note that the Nasdaq’s movement since Friday has formed a potential new rising channel (the gray lines). If that lower gray line holds, it would be a positive development. With Alan Greenspan speaking tomorrow and the Fed meeting next Tuesday and Wednesday, it may be tough to make much headway over the next week. The Nasdaq is overbought and due for a pullback, but we expect any correction to be modest, perhaps to the gaps at 2618.55 on the Nasdaq and 2470.72 on the Nasdaq 100, and certainly no lower than 2450 on the Nasdaq, the lower channel boundary (black line) in that chart. The quick return of momentum buying to the Nasdaq has come as a surprise, but flattening/topping patterns in indicators such as CCI, PPO, MACD and stochastics seem to argue for a pullback or at least a pause here.

The ISDEX hit out upside target of 460 today, and after a 53% gain since Jan. 8, Nets are also due for a breather. That index too ran into a support line broken the other day, confirming the resistance in the Nasdaq.

The S&P 500 has moved back into its smaller rising channel broken Monday (the gray lines), a plus for the broader market. The index also set a higher high today and yesterday, another positive.

Also on the plus side, regardless of whether we look at the linear (point-based) or logarithmic (percentage-based) charts, the Nasdaq, Nasdaq 100, S&P 100 and S&P 500 all remain above the 4 1/2-month downtrends they broke out of recently. Those broken downtrend lines are providing support on both indexes. We reprint the logarithmic charts below; the linear charts, as should be expected, show an even bigger breakout out of those downtrend lines.

The Dow is so far holding onto its December bottom of 10,500, but remains a real source of concern. Money is flowing from the old economy stocks back into the Nasdaq, rather than the market rising as a whole. That is one point that clearly favors the bears. So far, that broken downtrend line at about 10,600 is holding. Critical support is 10,300 on the Dow, and a close above 11,007 would be bullish, particularly if the Dow Transports can get back above 3000 and stay there. The Trannies closed at 3002 yesterday, but fell back below that mark today.

Special report: For a free introduction to technical chart patterns and an overview of last year’s action in the stock market, visit http://www.internetstockreport.com/guest/article/0,1785,2571_500051,00.html.

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