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Breakfast with Brodsky



Good morning! As we walk into our offices this morning we see the futures bid flat to down which is not all that surprising considering yesterday's extremely weak action. The SPX opened higher, touched 1048 then turned and slowly grinded lower all day. Not once did we have a meaningful bounce and we went on to close on the lows and below the SPX's 50-day MA for the first time since late September. In addition to an already growing mutual fund scandal, news is out that currency traders at JPM and UBS have been arrested for conspiracy, wire fraud, money laundering, and securities fraud. Is this going to have a negative effect on the market? It's hard to see how it wouldn't. Time and time again we have seen scandals hit the financial sector and it is disappointing to see something like this come out. How far this latest blemish reaches is yet to be seen, but watch how these financial stocks react to this news. The Banking sector closed right above support of 918 and be mindful that its 50-day MA is at 916. A break of these levels will not be good for the market and this may be a catalyst to tip the scales in an already nervous tape.

One thing that was a bit alarming to me was the action in the VIX. Two days ago, when we traded lower, held the 50-day and bounced back, the VIX was up as much as 12% before pulling back some. Yesterday, which in my opinion was a worse sell off than Monday's, the VIX remained flattish most of the day. In its rawest sense, the VIX is a measure of fear in the market. When it is extremely high or low it is a great contrarian tool and the fact that there appeared to be no fear in yesterday's sell off tells me--and this is just an opinion-- that the market may be headed lower.

Taking a look at the three major indexes, technically we see some pretty negative charts. The Dow closed below its 50-day MA (9644) for the first time since September. Look for some support at the 9600 level and below that the next level is in the 9500 area. Remember that JPM is a Dow component and may weigh down the index. Look for resistance, if we get there, at 9710. The SPX also closed below its 50-day MA (1035) and look for the first level of support to come in at 1029 and then at 1018. On the upside, we can expect supply to enter the market at 1043. The NDX, which has been the best performer of the three, has come off the hardest in the last few trading days. Look for support at 1344 (the Gap level made at the beginning of Oct.) If 1344 is broken the next support level will be at 1300. If a bounce occurs, look for resistance at 1400.

The BTK (Amex Biotech) pulled off again yesterday and closed right above support of 437. A meaningful break of this level will push this index down to the 420 level where it held in August. The SOX (Philly Semi) closed below the 500 level for the first time since October, and the next level of support is at 490. The BKX (Philly Bank) was mentioned above but watch the XBD here as well. This scandal at JPM and UBS could spook investors in the other broker/dealers as well. The next level of support in the XBD (Amex Broker/Dealer) is at 600. Yesterday, Retail and Cyclical stocks closed on big support levels. During the latest downdraft these two sectors were among the first to turn down which may mean that they will be the first to hold and turn higher. The CYC (Morgan Stanley Cyclical) closed at 600 and a break here could push this index down to its 50-day, which is 586. The IRH (Amex retail) closed at 90, and unless this level holds there is much room to the downside. Lastly, the XAU (Philly Gold & Silver) continued to move higher and support is at 102, then 100, but expect higher prices to continue in this group.

Good luck.

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