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Breakfast with Brodsky

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Good morning. Earnings period seems to be pretty benign in terms of market rattling news which is helping us maintain a bid and is pushing the markets higher. Looking at a daily chart of the S&P, one can see that we have been steadily grinding higher since the beginning of December. We have had no correction, no significant pullback, and no concrete reason to sell the market. In talking to some bears I have heard all kinds of attempts to rationalize this move (and the entire move from last year as well) and although technically and fundamentally the market could not look better, there are still skeptics out there.

My point is, that not only are bears skeptic, but so are many bulls. This hesitation to buy across the board is another factor that is allowing us to make this kind of grind higher. It keeps fresh money creeping into the market and creates a constant bid. This bid frustrates the shorts and makes the longs nervous that they will miss the next move causing steady buying. What, if anything will derail this market?

Look back to 2000 and see if you can remember what caused the implosion of stocks. It was set off when Mircostrategy (MSTR: NASD) announced some accounting problems. The stock got pummeled to the tune of over $100 and a week later the NDX topped out. In my opinion, until something catastrophic like that happens, the market will continue to be healthy. But the more bearish sentiment, the happier this bull is.

Looking at a short-term picture of the indices, we can see that that they took a small breather yesterday. The S&P was unchanged; the Dow was weighed down by some of its components coming under earnings pressure, and the NDX initially traded down but was able to regain much of its loss mid-day and into the close. So where does this leave us now?

The S&P is clearly in an uptrend and the first trendline support lies in the 1129 range. If that level is broken we could trade lower to 1120 where we have solid support. In my view, unless these levels are breached we could expect higher prices in the near future. The Dow is looking a bit weaker with a possible doubletop taking place with yesterday's high of 10,616. Look for support in the 10,400-10,425 area. The NDX is also in an uptrend and look for trendline support at 1534. If that is broken the next stop could be 1513. Again, unless these levels are broken, higher prices could prevail.

Looking at a breakdown of the sectors, we see that the BTK (Amex Biotech) stalled out at 520 and after such a strong move consolidation would be healthy. A trade above 520 could ignite higher prices and watch for support in the 500-505 area. The SOX (Philly Semi) has been trading sideways for about a week and a trade above yesterday's high of 557 could push this index much higher. Look for support at 550 and then 539.

The BKX (Philly Bank) is consolidating and look for resistance at 993. The OSX (Oil Service) was able to rip back from 95 and close above 100 for the first time since June 2003. The 50-day MA has crossed above the 200-day MA, which could support higher prices in the index in the coming weeks. In addition, the XOI (Amex Oil) held 560 and worked its way back towards its 52 week high of 576. A trade above that level could spark further upside here.

The DRG (Amex Pharm) has retraced 38% of its move from the Dec. low to its recent Jan. high. It held 332 (38% retrace) and is attempting to consolidate. A trade above 336 could push the index higher. The CYC (Cyclical) is knocking on the 700 level's door. A break of 693 could send this index lower so watch for support at that key level. Lastly, the XAU (Gold/Silver) was able to retrace 38% of its recent down move and stalled at 102 (38% retrace.) The next resistance level is 105 which is its 50-day MA and also a 50% retrace of the down move. Near term support is at 100.

Good luck.
No positions in stocks mentioned.

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