Nortel Warns

Telecom equipment and networking stocks that soared during the day on Ciena’s strong earnings came back to earth after hours when Nortel Networks warned.

The ISDEX http://www.wsrn.com/apps/ISDEX/ rose 10 to 362, and the Nasdaq climbed 61 to 2552. The S&P 500 added 10 to 1326, and the Dow rose 95 to 10,891. Volume was unchanged at 1.1 billion shares on the NYSE, and 2 billion on the Nasdaq. Advancers led 16 to 13 on the NYSE, and 22 to 15 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.

Nortel plunged 6.50 to 23.25 after hours 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. Stocks that rose strongly during the day on Ciena’s earnings fell after hours, among them Corning , Juniper , and Sycamore . Hewlett-Packard met estimates and traded slightly lower after hours. Dell missed estimates by a penny and also traded down slightly. Dell announced 4% layoffs during the day.

Ciena rose 12 3/8 to 89 during the day, but traded down to 85 after the Nortel warning. Ciena beat estimates by 3 cents with 18-cent earnings and raising forward guidance higher.

Also during the day, Critical Path , halted for two weeks on accounting irregularities, finally reopened and plunged 7 1/8 to 2 15/16. Fourth-quarter earnings will be revised from a loss of 16 cents to a loss of 27-30 cents, and an investigation is ongoing.

Wireless Facilities fell 4 3/4 to 26 after beating estimates by 2 cents with 24-cent earnings, but JP Morgan downgraded the company on earnings visibility concerns.

Amazon.com lost 1/8 to 14 5/16 on a Prudential Sell rating. Sell ratings are rare on Wall Street, but Amazon seems to collect them.

Check Point , up 4 11/16 to 94 7/8, and Internet Security Systems , up 8 7/16 to 77, received Strong Buy ratings from Lehman Brothers.

Broadcom , up 2 9/16 to 83 3/4, and Applied Micro , up 1 1/16 to 48 3/16, benefited from CIBC World Markets comments that communications chip companies had fallen below their long-term growth rates.

Openwave rose 2 5/16 to 59 1/2 on a CIBC Buy rating. Competitor Comverse , which won an AT&T Wireless contract yesterday, rose another 7 11/16 to 107 3/4.

Interwoven surged 5 13/16 to 25 7/8 on a Prudential Volpe Strong Buy rating.

Homestore.com rose 4 15/16 to 34 7/8 on news of market share gains and hopes that a Department of Justice investigation will soon end.

Loudeye slipped 1/4 to 2 1/32 despite beating estimates. iXL lost 5/16 to 1 3/4 after missing estimates. Rare Medium surged 5/8 to 2 15/16 on strong earnings. Deltathree.com was unchanged at 2 3/32 despite beating estimates.

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The Nasdaq gapped up above its

September logarithmic downtrend line at about 2525 this morning (first chart). Since that gap up from 2491 occurred within a trading range, it is likely to fill at some point, and could fill as soon as tomorrow. Today’s breadth was much improved over yesterday, but was still weaker than we’d like to see on a 2% up day. The positive internals over the last two months have been a strong supporting factor for the market, so we do not want to see breadth and new highs/new lows begin to deteriorate. To the upside, that upper trendline in the first chart at about 2800 is critical resistance; if the Nasdaq can get above that, it should be a straight shot to 3000. The 2600-2700 range could provide resistance before we get to that line, however; today’s high was 2593. To the downside, we’d like to see the index form a new uptrend off its lows of Jan. 3 and yesterday, where the Nasdaq bounced off critical support, the 1990 logarithmic trendline, at 2388 (second chart).

The S&P 100 and 500 (first and second charts) recovered their December uptrends nicely this morning. To the downside, the S&P 500 is likely to find strong support at its broken September downtrend line (third chart) at about 1300. If the index can hold that 1300 level, it would form a perfect inverted head and shoulders bottom; a strong move above that neckline at 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 closed just under its October uptrend line at 10,800 yesterday, but bounced back strongly today. To the upside, we want to see the Dow take out 11,000 resistance convincingly, and soon. That is the upper boundary of what could be a bullish ascending triangle, with upside potential to 11,700 to 12,300. That pattern is quickly running out of room, however. 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 back above that level today.

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