Stocks Soar, But Volume Dries Up

Stocks posted impressive gains on Monday, but they came on the lowest trading volume in two months.

The ISDEX gained 20 to 747, and the Nasdaq gained 60 to 3849. The S&P 500 rose 19 to 1491, while the Dow soared 148 to 11,176. Volume declined to a meager 785 million shares on the NYSE and 1.22 billion on the Nasdaq. Advancers led 18 to 10 on the NYSE and 21 to 19 on the Nasdaq. The big economic report for the week is Wednesday’s Consumer Price Index. For earnings reports, visit our earnings calendar and reported earnings.

Value America was halted at 23/32 and never opened for trading after the online retailer filed for Chapter 11 bankruptcy. The company is discontinuing its e-tailing operations and reducing staff, and will focus instead on its electronic services business. For more on the story, click here.

It was a merger Monday for Net stocks, as several leading companies announced acquisitions. Aether Systems fell 6 1/16 to 143 3/8 after announcing plans to acquire wireless software firm Cerulean Technology for $150 million in cash and stock. Broadcom rose 15 7/8 to 240 15/16 on news that it will acquire privately held NewPort Communications for $1.2 billion. Red Hat gained 1 11/16 to 21 3/4 on news that it will acquire privately held C2Net Software for 1.99 million RHAT shares. GoAmerica gained 1 to 9 1/16 on news that it will acquire Hotpaper.com in a cash-and-stock deal worth about $10 million.

eBay slipped 5/16 to 48 3/16 on a Barron’s article that said the growth of the company’s core auction business may be slowing.

Commerce One slipped 1/16 to 50 1/16 after trading as high as 53 resistance on news the firm will be a key developer of an online metals marketplace, along with Germany’s SAP. i2 Technologies gained 8 1/16 to 155 to break through important resistance at 150.

VA Linux rose 1 15/16 to 41 15/16 on a CS First Boston Buy rating and $65 price target.

Kana Communications gained 2 to 34 15/16 on news of an alliance with Cisco Systems .

RMI.net slipped 1/8 to 2 5/8 after reporting a 39-cent second-quarter loss. VitaminShoppe.com also reported a 39-cent loss, 3 cents better than estimates, and the stock rose 1/8 to 1 1/4.

Buy.com gained 1/8 to 3 3/32 despite a PaineWebber Neutral rating and $3.60 price target.

marchFIRST gained 2 5/16 to 19 15/16 on news of a deal with Autoland.

Portal Software lost 5 1/4 to 50 on concern about the company’s earnings, which will be reported on Thursday.

Some technical comments on the market: A very interesting situation on the Dow. We definitely have an upside break of the bearish diamond pattern. But the problem is that it has come on two of the lowest-volume trading days of the year. How important is volume on an upside breakout? From Edwards & Magee, the bible of chart patterns: “It is … essential that an upside break in price be confirmed by a marked increase in trading volume; lacking volume, do not trust the price achievement.” In other words, odds are high that this breakout will fail. Almost every indicator on the Dow is overbought: stochastics, MACD, RSI, etc. A pullback much below 10,975, say below 10,950, would give us a failed breakout. Conversely, continued gains by the Dow need to be accompanied by high volume. It’s going to be an interesting week for the old economy stocks, with Home Depot reporting earnings tomorrow and Hewlett-Packard on Wednesday.< p>

The Nasdaq appears to be stuck in a narrowing trading range, and has yet to establish firm direction either way. The index may be forming a bearish flag pattern in the daily chart since bottoming at 3521 recently, giving the index potential for more downside. The index climbed above 3800 resistance today. Next up is the 50-day moving average at 3917 and the 200-day moving average at 3931. However, we would point out that the index never had a high-volume follow-through day to confirm its recent reversal, a negative sign. The Dow and S&P barely met the minimum requirements for follow-through days. The ISDEX also may be forming a bearish flag pattern here, signaling potential further downside on that index. Key resistance is now around 790, the lower boundary of a broken bearish rising wedge. Support on the ISDEX is at 693-700, 650 and 600; a break below 700 would just about break the bearish flag pattern. The S&P barely moved above 1480-1490 resistance today, which should now become support if the index is to build on these gains. Support can be found at 1450-1460 and 1434-1440. Critical support on the S&P is 1390, the index’s October 1998 uptrend line. A break of that trendline could carry the S&P to 1170 or lower, so we do not want to violate that line.

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