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Tuesday, December 14th, 2004 | 2:08 PM

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Witness Systems, Inc. (WITS $17.61) is a leading presence in the emerging and rapidly growing workforce optimization market, consisting of call monitoring and recording, actionable intelligence, workforce management, and other workforce productivity solutions. The firm is a member of the Computer Software-enterprise sector, which currently ranks 55 out of 197 (in the top 28%, not quite the top quartile) industry groups tracked by Investor’s Business Daily. During the past three months, capital has been flowing into the sector as the performance of the 160-member group has improved from a previous ranking of 100. Furthermore, there is plenty of leadership in the group with RightNow (RNOW), Ulticom (ULCM), Niku (NIKU), Tibco Software (TIBX), and Catapult Communications (CATT) all sporting relative strength ratings north of 90. In addition, institutional sponsorship in WITS has been on the uptrend, climbing to 68 at the end of the third quarter versus 30 at the end of the fourth quarter 2003. Also, management’s ownership of 10% aligns their interests with shareholders. Lastly, earnings have been solid, posting double-digit growth for the past five consecutive quarters, though future comparisons will be coming up against elevated levels.

What to Look For and What to Look Out For: It is important for today's early action to hold up through the session for a new high close, and it is most ideal for a close in the upper third of the day's trading range. It may currently be considered buyable under the CANSLIM guidelines, having exploded out of a cup-shaped pattern today on above average volume. A convincing follow through and close above the prior intra-day highs would be a very nice reassurance to have, however be sure to avoid chasing it too far extended beyond its pivot point.  Look for its prior high close of $17.17 on 10/19/04 and for its October resistance to serve as new support, assuming no prompt reversal of today's action. Note that the up/down volume ratio is a bearish 0.6 and its relative strength line has not yet challenged its mid-October peak. A dip below the low of the handle at $16.16 would be cause for concern and put the 50-DMA into play as the next critical support level.  As professed regularly at CANSLIM.net, limit losses to a 7%-8% maximum to avoid more devastating losses.

Technical Analysis: After falling to the $9.64 mark in intraday trading on July 22nd, then powerfully reversing, shares of WITS sprinted to new highs.  Following the $17.49 peak on October 4th it consolidated back under its 50-day moving average line to successfully test chart support in the $14 area. In the process, the stock etched a cup-shaped base with the right side handle commencing on December 3rd at the $16.93 mark. Subsequently, the issue drifted just slightly lower in quiet activity before breaking out during today’s session.