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THE MARKETS

As we said, less than a reassuring rally in the Nasdaq, and the S&P 500 imitated the Nasdaq on the close. The Dow, on the other hand, bounced off support at 10,750 and posted almost a triple digit gain on slightly lower volume for the session, holding on to the lion's share of the gain with a late surge to counteract the urge to sell. The major indexes looked to be ready to move in tandem, but there is still a gulf of sentiment separating technology stocks and other industries.

Overall market stats:

VIX: 23.46; -0.76. Volatility is approaching levels that tend to stifle upside moves. Given that today's move was not a wildly bullish one we have to be ready for the rally to end at some point in the near future if not tomorrow based on the after hours trading.

Put/Call ratio: 0.64; -0.09. Put players backed off on the strong rally, and indeed we feel that there was some short covering going on Wednesday and early today. What will be interesting to watch is how this ratio responds if we see this rally fail. We we want to see it spike higher and move into the next range of 0.8 and better.

NASDAQ:

Gapped higher, raced ahead, sold back to where it started the day, all on higher volume. Technically a mixed day with the late close and after hours torching taking precedence in our view. Futures are down about 60 points below fair value. Without the after hours selling we would still be confident about tomorrow with perhaps some weakness early on that once again ignites the buyers. After the surprisingly negative reaction to the NT news, however, we will have to see how the index recovers in the morning. It could still work out well with a weaker open and recovery, but not as clear in the smoke and dust of NT.

Stats: Up 61.51 points (+2.5%) to close at 2552.91, giving back 40 points from its high (2593.09).
Volume: 2.111 billion shares (+6.34%). Another strong volume day that saw up volume improve to 1.621 billion shares and down volume shrink to 426 million shares. A very solid volume day, and the lack of sellers shows that buyers were indeed in control.
A/D and Hi/Lo: Advancing issues jumped out in front 1.5 to one. New highs rose to 92 (+17) and new lows fell to 36 (-38).

The Chart: http://www.investmenthouse.com/cd/$compq.html

Strong volume and solid buying, but a disappointing close to the session. Futures look bad after the NT news, but we are still going to watch for some weakness that the index just may overcome. NT has a recent history of earnings troubles even as other companies in its sectors were reporting strong earnings in the fall and in January. We do not agree with those who say that this weakness is going to spread to other companies. LU was its own worst enemy. NT is showing that it is taking its eye off of the ball over the past six months or more. Even as they struggle and warn, others are posting impressive profit gains.

Will the Nasdaq immediately fill the gap? It may work on that early in the session tomorrow, but if this move has any life at all, it should hold at or above the previous close (2491) and reverse its course for a gain on strong volume. Remember, with so many mutual funds these days, a few can paint the volume tape to look stronger. Today's volume was indeed strong given the new method of counting (6% to 8% lower than previous), indicating that more than a few institutions were buying. Still, not a lot of great patterns in the big names, and thus we have to remain concerned about the durability of this rally.

Dow/NYSE: The Dow refuses to give in, rallying from support on slightly lower volume. And, it did not give up at the close. The Dow looks to have nine lives.

Stats: Up 95.61 points (+0.9%) to close at 10,891.02.
Volume: NYSE volume is a question mark. Last night it clocked in at 1.118 billion shares, but today the NYSE reported 1.150 billion shares for 2-14. So, volume today at 1.132 billion was 1.6% lighter on the gain. That keeps the Dow out of a positive price/volume day. Up volume was higher at 687 million shares while down volume fell to 432 million shares. Today's action does not wash away those distribution days.
A/D and Hi/Lo: NYSE advancing issues moved back in front 1.20 to 1. new highs fell to 159 (-6) and new lows also fell to 15 (-11).

The Chart: http://www.investmenthouse.com/cd/$dja.html

Again, the Dow is maintaining its ascending wedge pattern, trying to break out over 11,020 to 11,028. It has spent a lot of time at this level without success and without good price/volume action. It is trying, but it is not making it. It has to have some volume to get it over the hump, and as noted, that is not happening right now. It has to clear this level to make any progress, and it has to do it on strong volume.

S&P 500: The big caps were roaring as was the Nasdaq, but they too gave back a chunk of the gains in the last two hours. Its gain was less, but it gave back less of its gains as well. Note where it hit at its high and bounced back down: 1331.29. That level has pushed it back all week, and with the lighter NYSE volume on today's gain, it once again is lacking the power to make a solid move to take it out. Tomorrow we expect a down open, and we will have to see if the trendline at 1297 holds (that would take a lot of selling to get there, and we don't think things are that negative) for another run at 1335.

Stats: Up 10.69 points (+0.8%) to close at 1326.61.
Volume: NYSE volume fell to 1.132 billion shares (-1.6%).

The Chart: http://www.investmenthouse.com/cd/$spx.html

TOMORROW

Early morning economic news may help turn the NT tide that was washing over stocks after the close. If investors are starting to buy the fact that a strong economy is good for earnings, buyers could use early weakness as another opportunity to move into positions and reverses that tide. Those are the best days as they show true buying strength as buyers step into the face of selling and turn the market as opposed to hopping on the back of good news.

In any event, if things stay as they are tonight, we anticipate a lower open. That will get us watching for a turn back up off of support levels for a continuation of the rally. Of course, we have the added element of a long weekend that may cause many to pull the trigger and sell to close positions over the weekend. For short term positions that can be a problem. Longer term, that should not worry us too much unless it overruns our sell points on more recent additions.

What do we do? Exercise supreme patience. Keep the solid patterns on the screen. Those stocks, especially the stocks in sectors that traditionally lead bull runs (e.g., technology) that are holding good patterns while the rest of the market jumps back and forth tend to be the leaders when the market really starts to rally. Look at SDS, SGR, LLL, SBUX, AEOS for example; all of the after hours carnage did not impact them at all as they continue to hold in their patterns, looking for a breakout move (LLL had another one today). While we believe the earnings megahounds such as JNPR, AMCC and friends will recover in the future, that is down the road as their patterns are atrocious. Don't feel you are missing out on a rally such as today because no rally thus far has really proved itself. We have the luxury of adding these big names on weakness, a bit at a time, until they form up great patterns and breakout. Then we pour on the coals. Those stocks that are performing well in this market, however, have something going for them. We are not talking about REITS and oil stocks, as those are left behind in the real bull moves. We are talking about the companies with innovative businesses and the potential to lead their sectors as they lead the market. That is how CSCO started its runs: it held above the carnage in market corrections, forming bases on top of the market while other stocks were mired deep in the bottom. Then when the market was ready for a bull run, it exploded out first and ultimately gained in the neighborhood of 80,000% at its zenith. Not all stocks that are holding up are the future CSCO's, but the fact that they are performing well in a weak market is a strong indication of business and earnings strength.

When we saw the double top today, we were selling calls on our positions. Even though volume was good, we had a hunch that things were not going to hold on to the close. The NT news will send stocks down early we believe, and we will be buying back calls in anticipation of a rally if we see support levels hold. Thus, we can still see the rally continue, but we have used the market's up and down action even while it rises to our benefit. While we may not be able to get much bang out of puts, selling calls on long term positions allows us to pick up incremental dollars to use to buy more stocks. We love to do this in our retirement accounts as we can make a few hundred, a thousand, a few thousand here and there with no tax worries. Indeed, if things turn and rally after early morning selling, we may just look to sell some calls when the market appears to be rolling over on Friday as some try to get out before the long weekend.

So tomorrow we look for breakouts from solid patterns, opportunities to tuck away a few more shares of our favorites if there is heavy selling in the morning but support holds, play momentum pre-splits to capture some pretty easy money, and take advantage of the volatility with covered calls on long term positions. There are many ways to skin the cat, and having a solid arsenal of strategies helps turn chaos into money in the pocket.

Support and Resistance Levels

Nasdaq: Closed at 2552.91.
Resistance: 2650. 2890 to 2900 is next before the 3000 level.
Support: 2300.

S&P 500: Closed at 1326.61.
Resistance: Interim at 1335. Then 1360 to 1375.
Support: Down trendline at 1300 to 1305.

Dow: Closed at 10,891.02.
Resistance: 11,020 - 11,028. After that, 11,400.
Support: 10,750. Then 10,650.

Weekly Economic Calendar (All times Eastern). The figures are the consensus expectations, not ours.

2-13-01
Retail Sales, January (8:30): 0.8% actual versus 0.5% expected and 0.1% prior.
Retail Sales ex-auto, January (8:30): 0.7% actual versus 0.4% expected and 0.0% prior.
Greenspan semi-annual testimony on economy, part 2.

2-14-01
Business Inventories, December (8:30): 0.1% versus 0.4% expected. November revised down to 0.3% versus 0.5% prior.

2-15-01

Export Prices ex-ag., January (8:30): -0.2% versus -0.2% prior.
Import Prices ex-oil, January (8:30): 0.9% versus 0.9% prior.
Philadelphia Fed, February (10:00): -30.5 actual versus -23.0 expected and -36.8 prior.

2-16-01

PPI, January (8:30): 0.2% versus 0.0% prior.
Core PPI, January (8:30): 0.1% versus 0.3% prior.
Housing Starts, January (8:30): 1.550M versus 1.575M prior.
Building Permits, January (8:30): 1.493M versus 1.493M prior.
Capacity Utilization, January (9:15): 80.3% versus 80.6% prior.
Industrial Production, January (9:15): 0.0% versus -0.6% prior.
Preliminary Michigan Sentiment, February (10:00): 94.0 versus 94.7 prior.

SUBSCRIBER QUESTIONS

Q: In your newsletter [on February 14] you talked about short covering as you have in the past. Just what does SHORT COVERING mean?
A: When traders are bearish on the market they play the fall. They either sell stock they do not own and hope to buy it back at a lower price and pocket the difference, sell calls on stock they do or do not own, or buy puts. In the first scenario, when stocks that have been falling suddenly find support and start to rally fiercely, those that sold the stock often want to close out positions and pocket their profits before things get out of hand. Problem is, there is demand for the stocks all of the sudden in addition to those wanting to close short positions by buying the stock back. In other words, buyers are out there who want to own the stock for upside potential, and they are bidding the price higher. As short sellers compete to buy the shares, the price rises, and that forces more short sellers into action and this can cause dramatic price increases in a hurry. The more short interest, the more fierce the action can be.

With options we can see that action in puts: those who have bought puts start to unload them when it appears the market is ready to bounce up. Thus sometimes we can see a spike in the put/call ratio as put buyers close out their positions when the market starts to turn. If we see the market turn and a correspondent increase in put activity, we can assume some of that was related not to investors betting against the market, but bears closing out put positions. What we like to see for the put/call ratio is a day when it spikes over 1.0 and there is no real reversal in the market that session. That shows that put buyers were entering the market betting on further declines, and they were in the majority. That is usually an indication a move down is about to end.

TEAM TRADES

We have been focusing on breakouts, and a small stock on the Tuesday Daily (ESA) started a move Wednesday, but made the real move today, clearing our breakout point early in the session. In fact, it gapped right over it about 20 minutes into the session and spent the next hour climbing to 19. It is easy to get caught up in the move and feel as if you have to chase it up, but those of you who have been with us awhile know that a stock will come back and test the move in most cases. In fact, ESA bounced down from 19 and started finding support at about 18.50, a point where it spent about 25 minutes as it was making its morning run. We could already see that there was good volume on the stock during the early run and that it had backed off on the pullback. If it broke back over 18.50, the high of the first consolidation, we felt it was worth an investment. While we were preparing the order, we saw a 10,000 share trade on the buy side tick off of the time and sales. That convinced us to go ahead and enter the position, and we put a buy stop at 18.55. As we entered the order at 25,000 trade on the bid side went buy at 18.50 and that made us think about canceling, but the bid kept climbing and the fill was made. The stock closed at 19.06 on very heavy volume. This is a new high for the stock on huge volume, so the plan is to let it run as long as the price/volume action remains healthy.

We also sold some March $30 calls on CTXS, some March 45 calls on NTAP, some March $40 calls on EXTR, and some March $100 calls on JNPR. We plan on buying most if not all of those back in the morning.

Good Investing!
Jon Johnson and the Tech Traders Report Staff.

All of the foregoing is commentary for informational purposes only. All statements and expressions are the opinion of Online Investment Services, LP or its paid consultants and are not meant to be a solicitation or recommendation to buy, sell, or hold securities. We are not licensed or registered in the securities industry. The information presented herein and on our related web site has been obtained from sources believed to be reliable, but its accuracy is not guaranteed. The security portfolio of Partners of Online Investment Services, LP or its paid consultants may, in some instances, include securities mentioned herein and on our web site. Estimates, assumptions and other forward-looking information are subject to the limits of forecasting. Actual future developments may differ materially due to many factors.

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