Tech Earnings May Lower Red Flags

Editor's Note: This story was originally published Aug. 10, and has been updated to correct an error.

The economic environment is extremely positive for technology for the remainder of 2005 and into 2006, as I have often written over the last few months. But I see some red flags that indicate there are factors in play that could impede the progress of the bull market for the Nasdaq(Nasdaq) that began at the end of April.

First, though it may not be showing it right now, the market is nervous about just how high the FOMC will raise the fed funds rate. I believe the Federal Reserve will raise the rate to 4%, then shift to a neutral policy stance. Investors also are concerned about volatile crude oil prices. The market's threshold of pain appears to be $62 per barrel on crude oil.

I see more cause for a blow to investor confidence. My daily chart profile for the Nasdaq warns of a correction, and its weekly chart profile is overbought. While a correction does not appear imminent, a close below 2162 on the Nasdaq would warn of a three- to five-week swoon.

And tech leader Cisco(CSCO) reported record earnings last night, but current-quarter guidance was a bit shy of expectations. Despite Wall Street's disappointment with Cisco's guidance, I have not seen any major broker downgrades. Wall Street has, for the most part, maintained outperform and buy ratings on the stock. For example, Bank of America cut its EPS estimates for Cisco and lowered its price target to $22 from $24, but kept its buy rating on the stock.

Cisco's lower open this session makes the stock 35.7% undervalued, so the stock's fair value remains $28.79. Those who still believe in the stock and want to maintain a core holding but trade around it will want to keep an eye on Cisco's monthly value level, which my model shows at $18.30, with the stock's 200-week simple moving average at $18.12. As I wrote in the Tech Trading Diary Tuesday, I expect this $18.12 level to act as strong support.