Net Sector Closes Down, and Some Think Recent Action Suggests Further Declines

Analyst reckons a topping out will have a domino effect, spreading from individual stocks to indices and then the sector as a whole.
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"If you build it, they will come." Likewise, if you talk about a correction and enough people are listening, it too will come. Right now, there appear to be enough people thinking a correction is likely in the Internet sector, though so far it is coming in small doses.

TheStreet.com Internet Sector

index ended down 4.92, or 0.5%, at 925.29. The DOT closed above critical support at 924.88 (more on that level later), though it did slip below that level to an intraday low of 915.02.

We hope we are not belaboring the point of a correction, but merely providing some guidance on what appears to be going on in the sector. And as even our own raging bull

James Cramer

pointed out

yesterday, a selloff was due.

Robert Dickey, technical analyst with

Dain Rauscher Wessels

, points to Monday's price action as indicating a top that suggests a potential for more substantial losses. On that day, the DOT made a new high at 1008.98, but closed lower at 969.40, which he said is a reversal top. Today, the DOT crossed below the Nov. 23 low of 924.88, but settled above it, thus postponing calls for an impending drop. Dickey said a close below that level would likely lead to another 100-point decline until it hit support around 810 or 815, an area that it consolidated around in mid-November.

Dickey said the sector could take a significant period of time to correct, anywhere from a few weeks to a few months. He points to the last time the DOT had a similar pattern, back in April. On April 13, the DOT traded to an all-time high of 844.20, but closed down at 776.18. At that time, the selloff persisted before bottoming in August.

Dickey said the topping pattern also can be applied to individual stocks. He said the sector will typically behave like a domino, with certain stocks topping out, then the indices doing the same, and pretty soon the entire sector is falling apart.

Among individual stocks, he said that

Excite@Home

(ATHM) - Get Report

showed the topping pattern on Nov. 23, when it traded as high as 59 3/4, but closed at 53 3/8. Today, it closed up 11/16, or 1.4%, at 49 3/16.

Likewise,

America Online

(AOL)

traded as high as 85 3/4 on Nov. 24 and closed at 84 1/2. Today it closed up 3 5/8, or 5%, at 76 1/2. Finally,

Amazon.com

(AMZN) - Get Report

peaked at 96 7/8 on Monday, but closed at 90 7/16. Today it finished down 1/16, or 0.1%, at 85.

Dickey said a normal pullback in the above-mentioned stocks and others that fall into the same pattern would be half of the gains that they made during November, when most Internet stocks took off.