DOT Takes a Dip as Net Sector Misses Out on Nasdaq Rally

If your stocks have shot up like rockets, be on the lookout for reversal days, one analyst cautions.
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Since TheStreet.com Internet Sector index reached a high of 853.06 Tuesday, it's failed in attempts to surpass that level over the past two sessions. Cause for concern or a normal pullback?

One technician claims there's nothing to worry about -- yet. Robert Dickey, director of technical research with

Dain Rauscher Wessels

, said it appears as if the Net sector is merely going through a normal correction after a strong move higher. The index closed down 13.69, or 1.6%, at 820.91, not participating in the rally seen throughout the rest of the

Nasdaq

.

Dickey said what the DOT was doing was very similar to what it did after going from 550 in late August/early September to 750 in October. In that instance, the DOT pulled back around 100 points, or 50% of the move, to just about 650 on Oct. 15 and Oct. 18. It has since gone from 650 to 850, so a similar move this time around would leave the index at 750 (all apologies for the simple math). And with the index around 820 today, it has already retraced roughly a third of the 100 points.

So what should you do? Dickey said he thinks the 750 level will hold until the end of the year. He said those holding positions should wait and see how the current pullback pans out, but begin to get more aggressive, adding to positions as the DOT gets closer to 750. What would be disturbing, he said, was if the index trades below 750, which could indicate something a little more serious. Support would be seen in 100-point increments, he said, though the first level, 750, was the most important.

Dickey also addressed whether traders should take money off the table. He said those who have had stocks that have shot up "like rockets" should be on the lookout for reversal days. A reversal day is one in which the stock trades to a new high on heavy volume, but closes lower.

One stock that fits this scenario is

Internet Capital Group

(ICGE)

. After closing at 186 on Nov. 8, the stock pushed to an all-time high of 195 1/16 on Nov. 9 on what Dickey said was strong volume, but closed lower at 182 11/16. Today it closed up 4 1/16, or 2.3%, at 178 1/16. Dickey said there is good support in the stock at 170 (it traded as low as 172 today), and he sees the stock moving another 25 points in whatever direction it breaks first within the 170 and 195 range.

A different example is

Foundry Networks

(FDRY)

. After closing at 206 on Nov. 3, it traded as high as 210 3/4 on Nov. 4 before closing at 204 (new high, lower close). But Dickey said that move was made on light volume, which he said indicated that it was not a very serious pullback and he expected it to push higher again, with 175 acting as support. One caveat, he said, was that the stock has only six weeks of history to draw up and technicians like to look at as much history as they can. Today it closed down 5, or 2.7%, at 178 1/4, trading as low as 177 1/2. Below 175, next support would be 140 to 145, he said.

While members of the

Red Hots have become the current rage in the Net sector, Dickey agreed to look at one of the "old" Nets,

Amazon.com

(AMZN) - Get Report

, which has had a bumpy ride of late. Dickey said the stock appeared to be stuck in a range from around 60 to 80 and whichever level breaks, he would anticipate another 20-point move in that direction.

There were some notable moves elsewhere.

Network Solutions

(NSOL)

closed down 11, or 7%, at 144 15/16. The company said it was holding an analysts' meeting today and also announced the purchase of

ImageCafe.com

, a privately held company that offers professionally designed, ready-to-deploy Web sites at what it claims to be reasonable prices.

Network Solutions also falls into the higher-high, lower-close pattern. Dickey said the volume was not heavy enough to be a concern, but the stock could still pull back to the 120 level (where it was trading just six days ago) and still be in good shape. Why? A 50% retracement of the stock's move from 80 in mid-October, to the 158 high from today comes out to 120.

Also, shares of

Software.com

(SWCM)

closed up 17 7/16, or 22%, at 95 15/16 after reaching a high of 108. Software.com CEO John MacFarlane appeared on

CNBC

midday and the stock may have run up, then seen profit-taking, in reaction to that appearance.