Earnings Warnings, Inflation Data Rock Stocks

A much stronger than expected reading in the Producer Price Index and earnings warnings from Nortel Networks, Dell and Hewlett-Packard sent stocks into a tailspin on Friday. As if that wasn’t bad enough news, the market dropped further around 1:30 Eastern Time when U.S. and British planes bombed Iraqi air defense systems.

The ISDEX http://www.wsrn.com/apps/ISDEX/ plunged 20 to 342, and the Nasdaq plummeted 138 to 2414. The S&P 500 dropped 28 to 1298, and the Dow fell 123 to 10,768. Volume rose to 580 million shares on the NYSE, but declined to 887 million on the Nasdaq. Decliners led 17 to 10 on the NYSE, and 25 to 8 on the Nasdaq. 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.

The Producer Price Index rose 1.1% in January, well above 0.2% estimates. The 0.7% gain in the Core also beat 0.1% estimates.

Nortel plunged 9.87 to 19.88 after warning that it will lose 4 cents a share, 20 cents below estimates. Nortel noted that it was now “seeing a faster and more severe economic downturn in the United States” than previously expected. Almost all stocks in the networking and equipment space were hit on the news, but none were hit harder than Nortel suppliers Corning , down 8.56 to 33.45, and JDS Uniphase , down 9 3/16 to 35 15/16. Corning said it would cut costs in response to Nortel’s warning. Warnings from Hewlett-Packard , down 4.49 to 31.86, and Dell , down 2 1/16 to 22 15/16, didn’t help.

Covad was halted after postponing its earnings report to review its revenue recognition practices. The few trades that went through were down substantially from yesterday’s 2 7/8 close.

Agile Software fell 3 7/16 to 28 7/16 despite topping estimates. Priceline.com fell 9/32 to 2 23/32 after missing estimates and warning, but the company said it expects to return to operating profitability in two quarters. NaviSite lost 7/16 to 2 5/16 on an earnings warning. Mail.com , down 5/32 to 1 1/2, also warned.

The one bright spot of the day was that a networking company was able to go public. Riverstone Networks priced at $12 and opened at 13 5/8.

Some technical comments on the market: Note: We are now including charts in the technical market commentary. If you can’t get the charts via the e-mail newsletter version, try this link: http://www.afterhourstrading.com/column.html

Back to critical support. The Nasdaq is right above its critical support, the 1990 logarithmic trendline, at 2388 (first chart). That line would definitively break on a close of 2340 or lower, but the Jan. 3 rally attempt wouldn’t be negated unless the Nasdaq closes below its Jan. 2 close of 2291, right about at the level where the Fed cut interest rates on Jan. 3. To the upside, a move above 2470, the downtrend line in the second chart, could give the index some room to run. That gap down today created an “island reversal” with yesterday’s gap up, which calls for a retest of the recent lows at 2388. Also, the Nasdaq gapped back below its September downtrend line today (the third chart); that line is at roughly 2500 at this point.

The S&P 500 broke back below its September downtrend line at about 1300 today. If it can turn up around 1294, the index could form an inverted head and shoulders bottom; a strong move above that neckline at 1375-1390 could carry the S&P 500 all the way to 1500. That may sound like a lot, but the average one-year gain in the stock market after two Fed rate cuts is 28%.

The Dow broke back below its October uptrend line at 10,800 today, so now all indexes have broken their uptrends; not a good sign, and could mean that the market is range bound at best. Next support is 10,600-10,650. To the upside, we want to see the Dow take out 11,000 resistance; a close above 11,007 would also be bullish under Dow Theory, the oldest school of technical analysis, particularly if the Dow Transports can stay above 3000; the Trannies are just below that level today.

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