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Breakfast with Brodsky

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Good morning. We wake to see the futures bid up slightly, which is not unexpected considering yesterday's action. While we started the day off extremely negative with indexes breaking support clear across the board, we were able to muster some strength and close the day not only off the lows, but also at that important 1044 level in the SPX. Does this mean we are going straight back to 1060? Considering the volatile market we are trading in, I wouldn't completely put it out of the question.

One thing is for sure, buyers are still out there lurking and waiting to pounce all over dips. The levels highlighted as support in yesterday's piece held in the SPX (1034), Dow (9640), and NDX (1390.) While that was encouraging action, one day of support certainly does not negate the downside risk we are facing. In my opinion, for the first time in weeks there is a fresh feel of fear that has entered the market. Personally, I think that this is necessary if a year-end rally is going to develop.

Looking at the charts of the major indexes, one can see quite plainly that we are closer to the top of the range than the bottom. As negative action sweeps across stocks people want to hold on to those gains and selling begets selling. That doesn't mean we are not going to be breaking through the old highs in the coming weeks but a few things need to happen first. First off, it was nice to see the VIX get a bounce yesterday as some fear swept into the markets. The VIX has largely been dead over the past two months but it woke up yesterday trading up as much as 12% at its highs. Higher prices here would make me feel more comfortable about a sustained move to the upside returning to the markets. Secondly, it is no secret that due to the recent and ongoing mutual fund scandal, redemptions have been hitting funds. In order to build up their cash reserves, funds have been selling and one can only guess as to when that supply will abate. And lastly, it would be encouraging to see the market hold support for more than one day. While we did hold on increased volume, the lows created yesterday need to hold on futures tests By paying attention to how news is being digested (i.e. bought or sold) and current technical levels we may be able to gauge where the market is going in the near-term.

Taking a look at the SPX we find near term resistance coming in at 1044-1045, which is the bottom of the old range. Look for support at 1035, yesterday's low, and then at 1030, which was where we traded and reversed to the upside in late October. The Dow looks very similar to the SPX. Look for resistance at 9720-9730 and support at 9630 and then at 9570. The NDX needs to trade above and hold 1400 to re-establish a healthy picture. Watch for resistance there and support to come in at 1380 and then the 1350 area.

The BTK (Amex Biotech) held up considerably well due to positive data out of Amgen (AMGN:NYSE). It closed on the highly watched 450 level. Look for 460 to be the top of the near term range and 437 to provide support. The SOX (Philly Semi), which has made three solid waves higher since the beginning of October, held support at 500 and rallied off its lows at the end of the day. Look for support at 500 and then at 490 while resistance can be found at 511 and then the 526-530 area, (which is its 52-wk high). The banks (BKX) put in a good show as well, rallying significantly off their lows. The 924-920 area will be support and a solid trade above 936 would be extremely positive and could push the market higher. The retailers (IRH) and cyclicals (CYC) tested support and both held considerably well but I would like to see some more work at these levels before diving in. The Pharma (DRG) stocks took a breather yesterday after three strong days of upward momentum. Watch for the DRG to hold the 320 level on a pullback. The Gold/Silver (XAU) Index rallied back as well to close above that 100 level highlighted yesterday.

Good Luck.

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