Microsoft Leads Market Lower

The first earnings warning from Microsoft in a decade sent stocks plunging in heavy volume on Friday, but technology and Internet shares closed off their worst levels.

The ISDEX fell 4 to 442, and the Nasdaq declined 75 to 2653. The S&P 500 dropped 29 to 1312, and the Dow lost 240 to 10,434. Volume soared to 1.5 billion shares on the NYSE and 2.6 billion on the Nasdaq. Decliners led by 16 to 13 on the NYSE and 25 to 13 on the Nasdaq. A tame Consumer Price Index report for November fueled hopes that the Federal Reserve will cut interest rates. For earnings reports, visit our earnings calendar and reported earnings. For after hours quotes and news, visit our after hours trading site.

Microsoft plunged 6 3/8 to 49 3/16 after lowering earnings and revenue estimates by about 5%. But Oracle rose 1 1/2 to 29 after beating estimates by a penny.

Red Hat added 3/16 to 8 7/8 after beating estimates by a penny with a 1-cent loss. The company expects to reach profitability next year and reported a strong cash position. CMGI slipped 25/32 to 8 9/32 despite beating estimates.

Earnings warnings continued to mount. Lionbridge , off 1 1/2 to 3 3/8, Tanning Technology , down 1 3/8 to 3 13/16, and , off 7/8 to 3, all warned of disappointing results.

Surprisingly, the B2C e-commerce giants who began the sell-off nine months ago held up relatively well. eBay rose 1 1/4 to 38 1/4, Yahoo added 1 to 33, and added 3/16 to 22 7/8 despite lowered guidance from shipping giants FedEx and UPS.

Cisco Systems dropped 1 13/16 to 49 1/8 after announcing the resignation of EVP of Worldwide Operations Gary Daichendt, a key company official.

Handspring plunged 5 1/4 to 46 1/2 ahead of the end of its lock-up period on Monday.

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:

Well, we can certainly forget our potential inverse head-and-shoulders bottoms in the Nasdaq and S&P indexes after Microsoft knocked any symmetry out of them today. However, we believe the market is making an impressive attempt to put in a bottom here. The Nasdaq 100 completed its inverse head-and-shoulders bottom before falling again; the classic interpretation of the negation of that highly reliable pattern would be to look for a bottom to reform, so we will stick to that position. The number of news lows on this retest (around 300) is much lower than the 800 new lows reached when we hit this level two weeks ago; that’s a major positive divergence. The indexes filled their last gaps today, at 1325/700 on the S&P indexes, and 2615/2554 on the Nasdaq indexes, another positive. Volume is extremely high today, aided somewhat by options expiration, but still a positive. And the indexes may have made higher lows today, yet another positive (we’ll wait for next week to make sure). So while we expect this retest to hold, a warning is in order: A harder-than-expected landing for the economy could lead to renewed selling, and we still have a few weeks of earnings warning season to get through. With so many firms reporting a significant slowdown, hopefully the Federal Reserve will take notice. Microsoft probably has the strongest business model of the New Economy giants, similar to a drug company. If Microsoft warns, the economy i

s not headed for a soft landing. Of the main indexes, the Nasdaq and S&P 100 have the most promising looking patterns, potential double-bottoms or rectangles:

The ISDEX seems to be holding up better than the Nasdaq indexes, forming a much higher low. The index still has a gap to fill at 406, but that’s probably less important than the Nasdaq and S&P gaps.

The Dow broke out of a bear flag this morning, with downside potential to 10,450, which it reached. We will set critical support at 10,300 on the index. As long as the Dow remains below 10,600, it has a bearish posture.

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