Net Stocks Buck Downtrend

Technology and Internet shares rose Thursday morning, bucking a sell-off in old economy stocks after Procter & Gamble issued an earnings warning and the European Central Bank raised interest rates more than expected.

The Dow fell 139 points to 10,673, below the important support level of 10,700, and the S&P 500 fell 6. But the Nasdaq rose 25 points to 3864 and the ISDEX gained 5 to 773. Decliners led advancers 15 to 10 on the NYSE, where 396 million shares changed hands. Decliners led 18 to 17 on the Nasdaq, where 656 million shared traded. Traders awaited Friday’s Producer Price Index for May, expected to show a 0.3% increase.

Traders took news of a judge’s order to split up Microsoft in stride. Microsoft fell 1/4 to 70 1/8. Linux play Red Hat fell 1 1/2 to 23 1/4, as traders took profits from a strong run-up in advance of the decision.

Troubled MicroStrategy continued its remarkable run, rising 4 1/2 to 42 1/8. The company is rumored to be close to securing a vital round of financing. Extended Systems continued its winning ways, up 3 to 67 7/8, but down from its intraday high of 74 7/8.

Yahoo continued its run, gaining 2 7/16 to 146 15/16. The stock was added to Morgan Stanley Dean Witter’s Model Portfolio yesterday. MP3 gained 9/16 to 17 7/16, down from an intraday high of 19 3/4, on follow-through from yesterday’s Wall Street Journal report that said the online music company could be close to settling its copyright infringement case with Time Warner .

Cisco continued to improve, gaining 1 23/32 to 64 19/32, after a Goldman Sachs recommendation. The tech bellwether has been trying to break its downtrend line the last few days. Each recovery in the stock since it peaked at 82 in April has stopped at a 62% retracement, including the most recent move from 72 to 50, its long-term support line.

OneMain soared 3 1/8 to 11 1/8 on new that EarthLink was buying the regional ISP for $308 million in cash and stock, or $12.27 per OneMain share.

ePlus gained 3 15/16 to 27 15/16 after the Internet-based B2B supply chain management solutions company reported Q4 net of $0.25, more than double the $0.12 First Call mean.

Travel sites were mixed despite positive comments from Donaldson, Lufkin & Jenrette. Travelocity.com
gained 1 1/16 to 20, while Expedia fell 3/8 to 21 1/8.

Ticketmaster Online gained 3/16 18 11/16 after Morgan Stanley Dean Witter initiated coverage with an Outperform rating.

CMGI gained 1 1/4 to 60 1/2 after CIBC World Markets started coverage with a Strong Buy and a $90-$100 target price, calling the company the “premier Netglomerate.” Commerce One gained 3 5/16 to 53 15/16.

webMethods continued its strong run, gaining 5 1/2 to 151 1/2 after announcing a partnership with Oracle Corp. to provide solutions for the deployment of global B2B exchanges. webMethods will be a preferred solution provider for integrating buyers and suppliers to trading networks and exchanges built on the Oracle Exchange platform.

NaviSite fell 7/8 to 54 1/16 ahead of its earnings, expected after the close today. Chase H&Q analyst David Levy made positive comments earlier this week regarding the company’s quarterly results.

Network Appliance displayed technical strength, gaining 4 to 82 1/8.

Juniper Networks rose 11 13/16 to 236 1/2, extended its earlier gains from talk
of a

co-marketing deal with Nortel . InfoSpace , up 2 1/8 to 57 7/8, and Digital Island , up 1 3/16 to 33 3/8, also extended Wednesday’s gains.

Some technical comments on the market: The Nasdaq still appears to be short-term positive; however, we continue to run into resistance just under the 3900 level (we turned back at 3890 today). The next resistance level after that is 3950-4000 (3982). If we get through those levels, a 50% Fibonacci retracement to 4100-4200 is likely. We do not want to go below 3725. We appear to have broken a bearish flag pattern in the Nasdaq to the upside; this is a good sign, and probably signals a Minor Reversal of the downtrend. The ability to ignore negative news is also a positive. However, we have bearish flag patterns in a number of key issues, such as Cisco and Amazon.com , that bear watching.

The Dow is more troubling; the break below 10,700 is a negative. The index continues to fail at its 50- and 200-day moving averages. It appears to be developing a descending triangle, a bearish sign. And as we’ve said before, the Dow and other broader indices are still developing 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. A word on the boundaries of these patterns: The boundaries of the Dow diamond are at about 11,200 and 10,300; a convincing break of either implies a 2,000-point move in that direction. The S&P 500 is probably the more important pattern to watch, because we are closer to the upper boundary and it is more representative of the overall market. The upper boundary appears to be at 1480, where we turned back last Friday. A convincing break of that level – and more importantly, 1507, the 78.6% retracement level from the high to the low – should propel that average up to around 1700. Click here for more on the diamond pattern.

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