Economic Woes Hit Techs Hard

Good morning! The stress felt by the financial sector slid into technology on Wednesday and then accelerated into Thursday after Cisco (CSCO) announced a lower-than-expected revenue forecast. The downside then continued into the weekend, beginning with a hearty downside gap into the open after heavy premarket selling kicked in around 5:00 a.m. ET. By the end of the day the Dow Jones Industrial Average ($DJI) had fallen 223.55 points (-1.7%) and closed at 13,042.74. The cumulative loss for the week was 4.1%. The S&P 500 ($SPX) lost 21.07 points on Friday (-1.4%). It closed at 1,453, which amounted to a loss of 3.7% on the week. The Nasdaq Composite ($COMPX), which had held up so well in recent weeks, was the hardest hit. It fell 68.06 points (-2.5%) on Friday, which added up to a staggering 6.5% drop on the week overall.

The S&Ps managed to fair a bit better than the rest of the market thanks to a bit of a reprieve in the down-trodden financial sector. Despite a great deal of weakness in recent months, particularly this past month, many of them managed to close higher on Friday. They had become very exhausted with extreme volume into support on the monthly time frames. American International Group (AIG) was one of the strongest on Friday, gaining 1.9% (1.06 points). Morgan Stanley (MS) also climbed, adding 1% (+0.52 point), while Wachovia (WB) gained 0.9% (+0.35). Granted, these gains seem minor compared to many typical intraday gainers, but given the extent of the market's downward slide, these gains were quite remarkable.

A few other stocks that managed nice gains on Friday were PriceLine (PCLN), Cephalon Inc. (CEPH), Brightpoint (CELL), Hutchinson Technology Inc. (HTCH), and Middleby Corp. (MIDD). All of these gapped higher and rallied on earnings. The overall market, however, was not that lucky. Some of the hardest hit were Mirant Corp (MIR), International business Machs (IBM), MetroPCs communications Inc. (PCS), Apple Inc. (AAPL), Research in Motion Ltd. (RIMM), Allscripts Healthcare Solution (MDRX), Amazon (AMZN), JA Solar Holdings (JASO), and Google Inc. (GOOG). Notice that out of the top Nasdaq losers, nearly every one of them had recently made new 52-week highs. As the top gainers, you may recall my comment about a week ago, whereby this also meant they would have the most room to fall... and fall they did...



After the large gap lower into the open, the market had a difficult time deciding quite what to do next. The indices had already sold off for two days in a row and most of the larger gaps in the indices themselves attempt to fill on the day of the gap. After so many extreme ups and downs, however, the bulls were less than enthusiastic about trying yet another rally after the one from the previous afternoon was so mercilessly crushed.

Volume remained high out of the open, but the market had a difficult time getting off the ground. Instead the indices fell into a choppy range out of the open. The S&Ps attempted to move higher at 10:00 ET, but the 5 minute 20 simple moving average in the indices held as resistance intraday and the market headed lower into 11:15 ET. This led to new lows on the week, but only by a hair. The very slightly lower lows created 2B reversal patterns in the S&Ps and Nasdaq. The 5 minute 20 sma served as resistance for a few minutes once again, but it broke at about 11:45 ET, taking the indices back to the upper end of the day's trading range.

The momentum then shifted back and forth well into the afternoon. The morning's highs and lows held as support and resistance until 14:00 ET. This is a major reversal period in the market, particularly if a range has been in play up until that point. Volume had dropped into the reversal period and the momentum had again shifted with slower downside as the volume declined. This increased favor for an upside breakout and the market pivoted off the lower end of the range in the Dow and Nasdaq at this 14:00 ET reversal period, taking the indices first back into the upper end of the range and then to new intraday highs.



The S&P 500, with help from the financials, was the only one of the three major indices to close their morning gap zone, coming within about a point of absolute closure. The Russell 2000, however, also came close and performed in a manner very similar to the S&P 500 throughout the session.

Once that resistance level from the gap hit, the market again began to roll over. They indices retested the highs, but at a more gradual pace and without any volume confirmation. This created a 2T form of double top whereby the prior highs broke by only a couple of ticks max before reversing again. The selling immediately turned into panic as market players who had hoped for a rally into the weekend began to trip over each other when the rally failed to confirm in order to get out before the closing bell.



Despite the market hitting strong support levels on the daily charts on Thursday and into Friday, the fact that the indices did not round off at that support leaves the market open for even more downside in the week ahead. I expect the momentum on any further selling to be slower than this past week and likely with more overlap in price from one day to the next. The move has the potential to try to mimic mid-May's activity in the Nasdaq, but the S&Ps and Dow should now continue to hold up a bit better compared to the Nasdaq. It would not take much to bring the Nasdaq back to the 2500 level. 12800 is the Dow's next major daily support, while 1400 is price support in the S&P 500.

I am not going to rule out the possibility of a bounce still off the current support, but to see any strong upside I'd like the market to round off at the support with some slightly lower lows. Otherwise upside will also be more choppy with a lot of overlap from one day to the next to begin with. The Dow and S&Ps would be able to move off this support more easily than the Nasdaq.

While these two scenarios of further selling or a rally seem to leave me hedged, the reason is that momentum on the smaller time frames is still pointing south, but all it will take is a shift intraday to turn it back over since the daily support in the S&Ps and Dow is rather significant. For instance, another gap down, followed by a strong bounce and then slower selling into the afternoon would make it easier for the market to hold the current support zone and turn higher. On the other hand, an even open or even a gap higher into the open, followed by slower upside in the morning can more easily be followed by more downside. So, it is that momentum change intraday that I'll be keeping a close eye on.



Online Trading Expo in Las Vegas

I will be out of town attending the Online Trading Expo in Las Vegas later this week, so I will not be writing this column from Wednesday night through Monday night. I return home on Monday, so the column will resume on Tuesday evening. For those of you attending, I'll be speaking for the expo at 8 a.m. Vegas time on Sunday and for Real Tick at 10:15 a.m. Sunday. I hope to see you there!