No Way To Treat A Trader

The bottoming patterns we’ve been tracking in recent weeks on some leading technology and Internet stocks began to break down in this week’s sharp market sell-off.

It may just be that these stocks have come too far too fast and need time to go back and regroup. After all, this has been one of the steepest rallies in U.S. market history, and some sort of pullback is to be expected. But if the goal of a bear market rally is to fool as many people as possible into thinking that the bottom is in, the way to do it would be with bullish chart patterns that then break down. As we’ve been saying in the daily technical commentary, 2000 on the Nasdaq and 1200 on the S&P 500 are our lines in the sand. Below those levels, a retest of the bottom is likely. Above those levels and the market looks okay.

We’ll start with the one genuinely positive chart, which is Microsoft . Mr. Softie is hanging on nicely, right under 72.50 resistance. A clean break of 73 would be bullish; that inverted head and shoulders pattern would give the stock long-term upside potential to 100. A break below 66-67 would be a negative.

The ugliest breakdown award goes to Juniper Networks , which took out support at 50, the level of the shoulders of its inverted head and shoulders bottom, and went all the way down to fill an island reversal gap at 40 (the arrow). The stock needs to get back above 50, and a clean break of 40 would likely take it back to about 33.

Ciena was another tough break for the bulls. The only clear break of its neckline came on an inverted hammer (see arrow in chart below), which was a reversal candlestick, showing a strong open and weak close. The stock has since broken down further out of what appears to be a symmetrical triangle or rising channel (the blue lines).

Openwave was one of the most promising of the patterns, a nice inverted head and shoulders bottom with a clear neckline. But the stock gapped back below that neckline at 40 two days ago. The stock could probably go as low as 31-32 without causing significant technical damage. 40 is now resistance again.

Network Appliance has struggled around the important 23.50 level for some time, and finally broke down on Wednesday. The stock held the level of its left shoulder, but it now has one cycle of a lower high and lower low, a negative.

Netegrity is still within the realm of a normal retracement, but it needs to clear the 38-40 level and stay there. 30 must hold if the stock gets that low.

CMGI continues to hold above 4 support; a clean break of 4 would likely carry the stock all the way back to the neckline at 3. The one negative is the stock set a lower high recently.

And finally, two examples of old economy stocks that held their breakouts nicely this week. Tyco (first chart below) went back to fill a breakout gap at 56.50, but bounced back to close above the neckline of an inverted head and shoulders bottom. And United Technologies (second chart) held above its recent breakout to a new all-time high.

Again, the breakdowns among some leading technology stocks do not necessarily spell doom, but the stocks and the major indexes should be watched for signs of further weakness or the ability to reclaim important levels.

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