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I have attached an article on internet stocks from TRADEHARD.com. I
found it quite insightful.
JS
Special Report: Internets on the Edge
7/30/99
By Mark Boucher
With all the attention being paid to market volatility, and especially
the risks of Internet stocks, the following special report is
intended to raise awareness of how important it is to avoid unnecessary
trading risks and to be able to read market patterns as they develop.
There are five major Internet indexes: IIX, CINX, BUSNET, HMQTINET and
DOT. Right now all these benchmarks have been tracing out
head-and-shoulder top patterns since December 1998 and have now reached
critical junctures.
Figure 1 shows a chart of the Chicago Board Option Exchange Internet
Index (CINX); the head-and-shoulders pattern and breakdown level are
clearly evident.
Figure 1. Chicago Board Options Exchange Internet Index (CINX), daily.
Source: Quote.com.
None of the patterns in these indexes have triggered yet, but they are
getting close. If these indexes all penetrate their respective
breakdown levels (see below), the downside risk for Internet stocks
increases dramatically; declines on the order of 35%, and quite
possibly much more, could take place.
One of the reasons the situation is so potentially explosive is the
high correlation between rising
Internet stock prices and margin debt. Fed Chairman Alan Greenspan
actually expressed concern in his recent testimony before congress that
much of the margin debt in the stock market was concentrated in the
Internet stocks. A reversal in the Internet sector could unleash a
flood of margin calls and forced selling.
The breakdown levels for the key Internet indexes based on their
head-and-shoulder patterns are:
IIX < 250
CINX < 385
BUSNET < 129
HMQTINET < 350
DOT < 495
The breakdown levels for stocks are:
Amazon.com (AMZN) < 84
America Online (AOL) < 89
Yahoo (YHOO) < 117
Inktomi (INKT) < 80
Lycos (LCOS) < 34
Mindspring (MSPG) < 27
CNET (CNET) < 38
E Trade Group (EGRP) < 30
USWEB (USWB) < 17 1/2
The following stocks have already broken down:
Level 3 Communications (LVLT)
Qwest Communications (QWST)
Sportsline (SPLN)
eBay (EBAY)
Spyglass (SPYG)
The following Internet stocks have held up so far:
Adobe (ADBE)
Silicon Graphics (SGI)
Qualcomm (QCOM)
SFTBF (SFTBF)
Whenever classic patterns like head-and-shoulders or double tops and
bottoms appear in a wide industry, and they all break down within a
very short time period, the signal becomes very significant. This is
all part of reading the market--being able to synthesize the
information from various related indexes and the stocks in them. When
they're all shouting the same message, it's in your best interests to
listen carefully.
You should continue to monitor these stocks and indexes carefully in
the coming days and weeks to stay abreast of a potentially significant
change in the outlook for this sector and its implications for traders.
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