Stocks Shake Off Earnings Worries

Stocks staged an impressive recovery Tuesday, ignoring an earnings warning from NBC Internet and a downgrade to Hewlett-Packard.

The ISDEX rose 6 to 734 after falling as low as 699, and the Nasdaq powered 83 points higher to 3851 after testing support at 3700. The broader market shook off concerns over Hewlett-Packard’s earnings . The Dow rose 57 to 10,621 after testing its key level of 10,500. The S&P 500 surged 23 to 1469. Advancers led decliners 15 to 13 on the Big Board, where volume rose to 925 million shares. Breadth was even on the Nasdaq, with 1.4 billion shares changing hands. Weaker than expected retail sales and comments from Fed officials gave investors hope that the economy is slowing and that the Fed might not have to raise interest rates as aggressively. The Consumer Price Index, expected to show a 0.2% gain in May, is on deck for Wednesday.

Shares of NBC Internet , down 7 to 17 5/8, led portals and advertising companies lower. AskJeeves fell 1 3/16 to 20 1/4, About.com fell 4 3/4 to 33 1/4, and DoubleClick fell 61/64 to 43 1/32 after testing key support at 40, despite positive comments from Merrill Lynch’s Henry Blodget. Goldman Sachs had sparked a sell-off in the stock yesterday on concerns over declining Internet advertising spending, which was also cited by NBC Internet.

Engage fell 1 3/8 to 15 9/16 despite beating analyst estimates after the close Monday. The company lost 2 cents a share in the third quarter, 5 cents better than forecast. Revenues rose 1034% to $58.7 million, primarily due to the acquisition of Flycast. However, there was some concern about cash burn. Engage spent $43 million in the quarter, finishing with a $90 million cash balance. However, the company’s majority owner is CMGI, which could provide cash if need be. CMGI was unchanged at 56 1/2 during regular trading.

After the bell, CMGI reported that it lost $1.53 in the most recent quarter, better than the $1.83 analysts expected. The stock rose to 58 in after-hours trading. FatBrain reported that it lost 65 cents in the first quarter, better than the 88-cent loss analysts expected. .

Blodget made a broad call on business-to-consumer Internet stocks. He noted that only 5 of 400 are profitable, and said he expects that number to rise to 15 to 20 in three years. He also said the sector is going through a healthy shakeout. The B2C stocks he likes are DoubleClick, Yahoo! , up 2 to 139 7/16, Amazon.com , up 1/2 to 48 15/16, eBay, up 1 7/16 to 68 1/4, and Homestore.com , off 7/8 to 27 1/4, and Priceline.com , up 1 1/2 to 43 1/2.

Shares of recent IPO Hotel Reservations Network exploded to a new high, soaring 7 5/8 to 34 3/4.

Shares of Biznessonline.com gained 21/32 to 5 3/4 after Kaufman Brothers began coverage with a Buy rating and a price target of $15.

E.piphany surged 10 7/8 to 98 1/8 and BroadVision gained 3 1/8 to 52 1/8 after Salomon Smith Barney began coverage of both issues with a Buy rating. EarthWeb gained 1 13/16 to 15 1/6 after W.R. Hambrecht upgraded the firm to Strong Buy with a price target of $25.

Rumors of an impending buyout by Corning drove shares of SDL Inc up 20 33/64 to 282 1/2. Redback Networks gained 15 3/8 to 123 7/8. Brocade gained 11 5/16 to 145 5/16 on news of an alliance with Cisco .

Commerce One rose 4 5/16 to 56 3/8 on news that German software company SAP is taking a $300 million stake in the company.

RealNetworks rose 3 11/16 to 43 13/16 on news that Japanese electronics company Matsushita

Electric Industrial Co is joining with the company on new Internet music distribution technology.

Shares of eToys fell 1/32 to 6 3/8 after receiving a $100 million cash infusion from a private placement of series D preferred stock.

Loudeye Technologies declined 9/16 to 19 7/8 after the provider of digital media solutions for the Internet announced that it will acquire privately-held VidiPax, an independent provider of video and audio restoration and migration services.

MicroStrategy rose 3 7/8 to 42 13/16 a day after Blodget took the steam out of rumors that the company was close to obtaining critical financing. The company announced the launch of MicroStrategy Transactor, a platform that allows companies to build transaction systems to better serve their customers over the Web, wireless and voice.

Shares of Digital Island gained 4 31/32 to 37 3/4 after a presentation at the Bear Stearns technology conference.

Some technical comments on the market: An impressive recovery today. We held some crucial levels on the Nasdaq (3700) and Dow (10,500). The Nasdaq found support just above its 200-day moving average (3688). Watch those numbers for a sign that we could be headed lower. Below that, critical support is 3600 on the Nasdaq and 10,250-10,300 on the Dow; a convincing break of those levels could send us much lower. On the upside, we want to break 3900 on the Nasdaq and 10,700 on the Dow. Some potential signs of trouble: We are very close to a bearish moving average crossover on the Nasdaq. The Dow 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’s upper boundary is at 1480, where it turned back recently; a decisive break of that level could be the first sign that we are headed higher. That’s only about 1% from here.

Some charts of interest:

I’m seeing “rectangle” patterns in some key Internet issues. These are normally “consolidation” patterns, which means they are just a breather before a move in the same direction (down in this case). However, they can serve as bottoms if a stock has already experienced a substantial decline. So I’m going to call their appearance here neutral and play the breaks.

Ariba is forming a picture-perfect rectangle, bounded by 49 on the downside and 83 on the upside. This means that what we have here is either a $15 stock or a $117 stock: when a rectangle is broken, the predicted move is the measurement of the pattern beyond the point where the pattern is broken. That gives us a 34-point move beyond either 83 or 49. The way to play this is to wait for the pattern to break (the rule of thumb is a close 3% beyond the boundary of the pattern on high volume, particularly to the upside), and then go long or short, depending on direction. And watch out for traceback moves back to the boundary of the pattern!

The ISDEX also appears to be forming a rectangle, bounded by 600 on the downside and 800 on the upside. You know what that means.

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