Traders Spooked By Strong Economy, Weak Earnings

Traders were spooked Friday by a stronger than expected report on domestic growth, raising the specter of another Fed rate hike in August. Lingering worries about corporate profits carried over from Nokia’s earnings warning on Thursday, sending Internet and technology stocks sharply lower.

The ISDEX fell 38 to 693. The Nasdaq lost 179 to 3663. The S&P 500 dropped 29 to 1419, and the Dow fell 74 to 10,511. Volume declined slightly, to 979 million shares on the NYSE and 1.76 billion on the Nasdaq. Decliners led by 2 to 1 on the NYSE and 28 to 11 on the Nasdaq. Second-quarter GDP came in at 5.2%, well above 3.7% estimates, but inflationary measures were more in line with estimates. Michigan consumer sentiment came in slightly above estimates. For earnings reports, visit our earnings calendar and reported earnings.

Internet advertising firms were higher on news of a settlement on consumer privacy issues with the Federal Trade Commission. DoubleClick , which spearheaded the plan, gained 2 27/32 to 36 29/32. 24/7 Media added 7/8 to 12, and Engage rose 1 5/32 to 10 7/16. CS First Boston reiterated Strong Buy on DoubleClick, saying the agreement allows the company to maintain its business plan.

A “takeunder” of Alteon WebSystems didn’t help the mood. The stock lost 14 11/64 to 128 13/16 despite news that it will be acquired by Nortel . Before Nortel’s stock dropped, the offer was barely above ATON’s closing price on Thursday.

JDS Uniphase fell 12 13/64 to 116 13/16, a day after closing back below its recent breakout point of 130-131.

EarthLink was downgraded by Morgan Stanley Dean Witter to Neutral a day after beating estimates by 7 cents with a 29-cent loss. The stock fell 2 1/64 to 11 1/2.

eToys beat estimates by 2 cents with a 37-cent loss. The stock added 3/32 to 5 5/32 despite a Goldman Sachs downgrade to Outperform from Trading Buy.

Clarent beat estimates by 6 cents with 4-cent earnings. But the stock got crushed, off 29 1/8 to 45. beat estimates by 6 cents with a 29-cent loss, but the stock lost 7/32 to 1 3/16. beat estimates by a nickel with an 18-cent loss, but fell 11/32 to 4 1/32. iVillage missed by 6 cents with a 94-cent loss, and announced that President Doug McCormick would replace CEO Candace Carpenter, who will remain as chairwoman. The stock lost 9/32 to 6 1/4. beat estimates by 3 cents with a 34-cent loss, but dropped 23/64 to 2 1/4. bucked the trend, rising 13/16 to 17 after beating estimates by a penny with a 31-cent loss. SG Cowen upgraded the company from Buy to Strong Buy. STC beat estimates by 8 cents with a 16-cent loss, and the stock rose 3 11/16 to 26 3/4.

Breakaway Solutions lost 4 to 24 despite beatings estimates by 2 cents with a 2-cent loss. InterTrust reported in line with estimates at a 13-cent loss, and the stock declined 2 1/2 to 14. beat by 2 cents with a 45-cent loss, but the stock dropped 1 5/8 to 6. Digital River lost 27/32 to 6 3/8 after beating estimates by a penny with a 39-cent loss. lost 1/16 to 3 9/16 despite news of a 10% stock buyback. Verio rose 5/16 to 54 1/2 on news that NTT has extended its tender offer until August 14.

It was a good day for IPOs. Corvis priced at 36, opened at 95, and closed at 85 3/8. WebEx priced at 14, opened at 18, and closed at 33 1/16. Avici Syste

ms priced at 31, opened at 90, and closed at 96 3/4.

Some technical comments on the market: The Nasdaq closed at 3663, almost exactly at the 50% Fibonacci retracement level of the gains from 3042 to 4289. It’s not likely to be a short-term bottom, however. The index broke important support in the 3696-3725 range, and turned back up at 3642. That would appear to set up a test with the critical support level of 3585, as it’s not likely that selling would stop between two important support levels so close together. Also, the Nasdaq left a big gap up at 3585 in early June, so it seems likely that it would fill here. And the Nasdaq broke a bearish flag to the downside shortly before the close, and would have to decline another 50-100 points to complete the pattern; that move would fill the gap, and hopefully give us a short-term bottom here. A break below 3550 could send the index all the way back to 3042, if not lower, and would fulfill the move predicted by the break of the bearish rising wedge on Monday. If the selling can stop at 3200, the Nasdaq will have formed an inverse head and shoulders pattern, a classic bottoming pattern. If not, then 3000 may not be the index’s final low. The ISDEX broke its rising wedge to the downside this morning when it penetrated 725; the break could carry the ISDEX all the way back to 560, its May low. However, 700 has proven strong support; a closing break of the index’s recent intraday low of 692 would be a warning sign. We closed right at 693 today, so there’s some hope for a rally here. The ISDEX’s intraday low today was 686. To the upside is the lower wedge boundary around 725-730, and above that is 790 resistance. Above that, the ISDEX turned back recently at 840, just below its 50% retracement level of 845. The top of the ISDEX’s rising wedge is now around 850. The S&P 500 also broke a bearish rising wedge on Monday, and has also descended swiftly since then. The S&P broke its 200-day moving average today at 1424. Critical support is 1390, the index’s October 1998 uptrend line. A break of that trendline could carry the index to 1170 or lower, so we do not want to violate that line. The Dow turned back today after testing the lower boundary of its bearish diamond pattern (10,464, but we’ll continue to use 10,200-10,300 because of strong support in that range and the requirement of a 3% break of a major pattern). A break of that line could carry the Dow as low as 8,500. The upper boundary of the Dow’s bearish diamond pattern is 11,000. The index turned back recently at 10,875. Have a good weekend.

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