S&P Moves Further Into Bear Territory

The S&P 500 was close to an official bear market on Friday for the first time since October 1990, as the brutal sell-off in technology and Internet stocks continued to spread to the broader market.

The ISDEX http://www.wsrn.com/apps/ISDEX/ lost 12 to 284, another new low, and the Nasdaq dropped 74 to 2170, its lowest level since December 1998. The S&P 500 fell 31 to 1221; a close at that level would mark a 20% decline from the index’s closing high of 1527. From its intraday high of 1553, the S&P was down 21.4%. The Dow dropped 187 to 10,339. Volume declined to 485 million shares on the NYSE, and 900 million on the Nasdaq. Decliners led 20 to 8 on the NYSE, and 26 to 9 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.

Sun Microsystems slipped 13/16 to 20 after warning that revenues will come in at 7-9 cents a share, much less than the 15 cents analysts expect. But the company also announced a $1.5 billion stock buyback program. Sun’s warning seem to do more damage to the rest of the market than it did to its own stock.

Wireless stocks were hit hard. Qualcomm plunged 15 7/8 to 15 1/4 after the company said third-generation mobile technology could be delayed until 2004 or 2005. Motorola warned, and Nokia was downgraded by Goldman Sachs. Surprisingly, wireless data firms like Openwave and Aether , already hard-hit, escaped relatively unscathed.

InfoSpace rose 7/16 to 3 7/8 on news that CEO Naveen Jain was buying share of the company.

Network Appliance fell 1 13/32 to 32 1/2 despite a $1 billion deal with Intel .

Priceline.com rose 5/16 to 2 23/32 on a Legg Mason Strong Buy rating and $6 price target, on the belief that the worst is behind the company and it should achieve profitability by June.

Stamps.com slipped 1/8 to 3 1/16 on a better than expected loss. Value Click lost 7/32 to 4 5/8 after beating estimates with 4-cent earnings but warning. Rhythms , unchanged at 1 1/32, topped loss estimates.

Cisco slipped 9/16 to 25 11/16, but continued to hold 25 support.

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The Nasdaq is breaking support from its early 1999 lows around 2185; the next strong support is 2028, the July 1998 top (see first chart for both support levels). The Nasdaq is extremely oversold and well overdue for a bounce, so we expect one to start by Tuesday at the latest, if not today. However, we’re not sure how strong that rally will be; the Nasdaq has really rolled over since it broke its 1990 logarithmic trendline at 2388 on Tuesday (second chart). To the upside, the Nasdaq faces resistance at 2250-2350, and then the all-important 2388 level; we suspect the index may not be able to clear that level, barring some aggressive Fed rate cutting. As we said yesterday, the good news is that the previous four times the Nasdaq hit a new two-year low, it was 1% higher three weeks later and 30% higher a year later. Here’s hoping the techs hold true to form. Note: see long-term trendlines at the

bottom of this column.

The S&P 500 is breaking support from its early 1999 lows at about 1225 and will officially enter bear market territory on a close of 1221. The next strong support is the July 1998 peak of 1190 (both supports in the first chart). To the upside, the S&P needs to get back above its September downtrend line at about 1290 (second chart).

The Dow is so far holding the important 10,300 level, but had no follow-through on its potential reversal formation from yesterday. It would be very nice to hold 10,300, but the index could go as low as 10,100 without a major technical breakdown (both supports in chart below). To the upside, first resistance on the index is 10,500, followed by 10,600-10,650. Critical resistance is 11,000, but given the breakdown in the Dow Transports, which fell below 2900 today, a Dow Theory bull market confirmation does not appear likely soon. The Transports must get back above 3000 and stay there, and the Dow must close above 11,007 to get an all clear signal under Dow Theory.

Let’s take a look at some long-term trendlines to get a sense of where we are here. The Dow and S&P (first and second charts) broke their 1994 logarithmic trendlines last year. The Dow has traded sideways since then, while the S&P has continued to fall. It shows two possible scenarios for the Nasdaq if it can’t recover its 1990 trendline at 2388.

Finally, a look at the main supports of the bull market that began in 1982 shows the next major trendlines at about 8250 on the Dow, 1000 on the S&P 500, and about 1350 on the Nasdaq. We’ll get a strong rally long before those lines ever come into play, if they ever do come into play, but they are worth taking a look at.

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