War Fears Cut Short Rally

A strong rally Monday on a better than expected court decision in the Microsoft antitrust case gave back much of its gains by the close on news that the U.S. may soon call up reserves.

The Nasdaq rose 35 to 1396, the S&P 500 gained 7 to 908, and the Dow rose 53 to 8571, 159 points off its high for the day. Volume surged to 1.64 billion shares on the NYSE, and 2.38 billion on the Nasdaq. Advancers led 19 to 13 on the NYSE, and 20 to 12 on the Nasdaq. Upside volume was 68% on the NYSE, and 82% on the Nasdaq.

After the close, Applied Materials announced layoffs and Hutchinson topped estimates.

During the day, Microsoft surged 6% on a court ruling that left intact most of the antitrust settlement with the Justice Department.

Amazon lost 5% on a negative Barron’s mention.

Cisco gained 6% ahead of Wednesday’s earnings report. Qualcomm edged higher ahead of Thursday’s earnings report despite negative analyst comment.

Computer Sciences rose 4% ahead of its earnings report tomorrow night, and on rumors of a contract win.

University of Phoenix Online was hit by news of insider selling at parent Apollo .

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Well, we got improvement in volume and news highs and lows today, but it came on a very ugly day for the market. The Nasdaq (first chart below) formed a bearish gravestone doji star just under its August high (1426.76). A gap down and a red candlestick tomorrow could cement a top in the index. But would it be a major top, or just the start of an overdue correction? Based on the VIX (second chart), the options volatility index, which finished up today, fear remains a supportive factor for the market. Also, the equity-only put-call ratio rose as the market declined today, another nice sign of skepticism. The equity PC ratio has yet to have a single close below .50 in this rally; the August top had four of .45 or lower. Also on the plus side, we finally got a day when new highs outnumbered new lows, and by a wide margin too (45-23 on the NYSE and 83-28 on the Nasdaq). All in all, a lot of positives for the rally to build on, and if it corrects here, we’ll look for positive divergences and for fear to rise on any pullback. 1360 is first support on the Nasdaq, and 1347 is a good support level; if that goes, 1300 would be the next likely target. The Dow (third chart) and S&P (fourth chart) are also hitting heavy resistance here at 8726-8762 and 911-924. 8550, 8450 and 8200-8300 are possible supports on the Dow, and 900, 890 and 870-880 on the S&P. 8100 is critical support on the Dow, and 860 is critical support on the S&P.

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