Stocks Pull Back from Highs

Stocks initially rose but then pulled back Friday morning. Net stocks were buoyed by financing deals and news of MP3’s settlement with Time Warner.

The Dow gained 10, pulling back below 10,700 after a strong start. The S&P 500 gained 2 and the Nasdaq 39. The ISDEX fell 1 to 770. Advancers led decliners 15 to 11 on the NYSE and 21 to 14 on the Nasdaq. Volume was 378 million shares on the NYSE and 629 million on the Nasdaq. Traders initially cheered May’s unchanged Producer Price Index, better than the expected increase of 0.2%, but the core reading came in stronger than expected.

MP3 powered the ISDEX higher, rising 3 1/4 to 20 1/2 on news that the online music company has reached a settlement in its copyright-infringement suit with Time Warner . The stock has risen strongly since the Wall Street Journal reported earlier this week that a settlement was in the works. The stock is down from an intraday high of 23. soared 4 11/32 to 11 3/8 after Paul Allen’s Vulcan Ventures invested $27.4 million in the provider of two-way video over the Internet. Vulcan purchased preferred stock convertible into approximately 3.4 million shares at a price of $8 per share and now owns 16.5% of the company.

Inktomi gained 3 1/2 to 129 3/8, a day after announcing plans to buy Ultraseek from Disney’s for $350 million in cash and stock, improving the company’s position in the corporate intranet market.

Shares of Open Market , up 2 15/16 to 18 15/16, and Chordiant , up 2 17/32 to 14 1/2, were particularly strong.

Share of Lycos were also on the move, up 2 13/16 to 66 13/16.

MicroStrategy continued to defy gravity, rising 10 7/16 to 54 9/16. The company is rumored to be close to securing a vital round of financing. Extended Systems continued its run, up 5 1/2 to 77 3/4. was up 1/4 to 94 1/4 after trading as high as 98 1/4. Wit SoundView started coverage with a Buy rating and 12-month target of 120, calling the company the world’s leading developer of WAP (Wireless Access Protocol) software and applications for the wireless communications sector.

NaviSite fell 2 1/4 to 51 7/8 despite beating earnings estimates by 10 cents with a Q3 loss of 29 cents a share. The stock had run up beforehand on word the earnings would be positive.

Network Appliance continued to display technical strength, up 3 15/16 to 89 1/4. Other issues showing strength were Exodus Communications , up 1 1/2 to 96, S1 Corp , up 1 1/2 to 38 3/4. webMethods continued its strong run, up 4 1/4 to 163 1/2. Shares of Digital Island also continued to surge, up 5 3/16 to 40 1/4.

Breakaway Solutions took a breather, down 2 /38 to 39 3/8, following a strong run since completing a $39 million private placement last Monday.

[email protected] gave back 15/16 to 22 7/8, a day after rising on rumors that the company could merge with European ISP Chello Broadband .

Some technical comments on the market: The Nasdaq made its third assault on the 3900 level this morning, pulling back at 3893. The third time is usually the charm with resistance points, when buyers finally overcome sellers. If that’s the case here, we should advance to our next resistance at 3950-4000 (3982). If we get through those levels, a 50% Fibonacci retracement to 4100-4200 is likely. However, we want to clear the current level in the next day or two, or we could be set up for a failure here. One sign of potential trouble is that we are a few

days from a bearish moving average crossover on the Nasdaq. Again, 3725 is as low as we want to trade. The Dow still looks troubled after its break below 10,700, but it did finish above support at 10,650. The index continues to struggle with its 50- and 200-day moving averages and appears to be developing a bearish descending triangle. And 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. The S&P 500 turned back at the upper boundary of its diamond pattern last Friday; watch 1480 for the first sign that we could be headed higher.

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