NBC Internet Warning Sends Net Shares Lower

An earnings warning from NBC Internet sent shares of Internet stocks lower Tuesday morning.

The ISDEX fell 23 to 704, finding intraday support at 700, and the Nasdaq declined 49 to 3718 after testing support at 3700. The broader market was troubled by concerns over Hewlett-Packard’s earnings. The Dow fell 40 to 10,523 after testing its key level of 10,500. The S&P 500 rose 1 to 1447. Decliners led advancers 14 to 12 on the Big Board and 22 to 13 on the Nasdaq. Volume rose from Monday, to 396 million shares on the NYSE and 611 million on the Nasdaq.

Shares of NBC Internet , down 8 7/8 to 15 3/4, led portals and advertising companies lower. AskJeeves fell 2 1/16 to 19 3/8, About.com fell 4 1/2 to 33 1/2, 24/7 Media declined 13/16 to 16, and DoubleClick fell 2 5/16 to 41 11/16, testing key support at 40, despite positive comments from Merrill Lynch’s Henry Blodget.

Engage fell 1 3/16 to 15 3/4 despite beating analyst estimates after the close Monday. The company lost 2 cents a share in the third quarter, 5 cents better than forecast. Revenues rose 1034% to $58.7 million, primarily due to the acquisition of Flycast. However, there was some concern about cash burn. Engage burned through $43 million in the quarter, ending with a $90 million cash balance. However, the company’s majority owner is CMGI, which could provide cash if need be. CMGI fell 2 5/15 to 54 3/16.

Blodget made a broad call on business-to-consumer Internet stocks. He noted that only 5 of 400 are profitable, and said he expects that number to rise to 15 to 20 in three years. He also said the sector is going through a healthy shakeout. Among the B2C stocks he likes are DoubleClick, Yahoo! , down 2 3/4 to 134 11/16, Amazon.com , off 1 11/16 to 46 3/4, eBay, down 3/16 to 66 5/8, and Homestore.com , off 2 3/8 to 25 3/4.

Commerce One rose 3 to 55 1/16 on news that German software company SAP is taking a $300 million stake in the company.

RealNetworks rose 3/8 to 40 1/2 on news that Japanese electronics company Matsushita Electric Industrial Co it is joining with the company on new Internet music distribution technology.

Shares of eToys rose 1/32 to 6 7/16 after receiving a $100 million cash infusion from a private placement of series D preferred stock.

Loudeye Technologies declined 11/16 to 19 3/4 after the provider of digital media solutions for the Internet announced that it will acquire privately-held VidiPax, an independent provider of video and audio restoration and migration services.

MicroStrategy rose 3 15/16 to 42 7/8 a day after Blodget took the steam out of rumors that the company was close to obtaining critical financing. The company announced the launch of MicroStrategy Transactor, a platform that allows companies to build transaction systems to better serve their customers over the Web, wireless and voice.

Shares of Digital Island were off 1/32 to 32 3/4. The company was expected to make a presentation today at the Bear Stearns technology conference.

Some technical comments on the market: We held some crucial levels on the Nasdaq (3700) and Dow (10,500) this morning. Watch those numbers for a sign that we could be headed lower. Below that, critical support is 3600 on the Nasdaq and 10,250-10,300 on the Dow; a break of those levels could send us much lower. We’ll worry about how much if it breaks that way. On the upside, we want to break 3900 on the Nasdaq and 10,700 on the Dow. Some potential signs of trouble: We are very close to a bearish moving average crossover on the Nasdaq. The Dow appears to be developing a bearish descending triangle. And the Dow and other broader indices are still developi

ng larger bearish patterns in the weekly charts that need to be broken to resume a new bull phase: “diamond” patterns in the Dow and S&P 500, and either a head and shoulders or diamond in the S&P 100. The S&P 500’s upper boundary is at 1480, where it turned back recently; a decisive break of that level could be the first sign that we are headed higher.

Some charts of interest:

I’m seeing “rectangle” patterns in some key Internet issues. These are normally “consolidation” patterns, which means they are just a breather before a move in the same direction (down in this case). However, they can serve as bottoms if a stock has already experienced a substantial decline. So I’m going to call their appearance here neutral and play the breaks.

Ariba is forming a picture-perfect rectangle, bounded by 49 on the downside and 83 on the upside. This means that what we have here is either a $15 stock or a $117 stock: when a rectangle is broken, the predicted move is the measurement of the pattern beyond the point where the pattern is broken. That gives us a 34-point move beyond either 83 or 49. The way to play this is to wait for the pattern to break (the rule of thumb is a close 3% beyond the boundary of the pattern on high volume, particularly to the upside), and then go long or short, depending on direction. And watch out for traceback moves back to the boundary of the pattern!

The ISDEX also appears to be forming a rectangle, bounded by 600 on the downside and 800 on the upside. You know what that means.

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