Breakfast with Brodsky
Good morning. Friday's trading marked the third trading day in a row where the action was extremely tight. This is of no surprise seeing that trading personal was light due to the holiday. As we head into the final stretch of 2003 we will see if the "end of year rally" will come to fruition. Word is out that the Bush Administration is more than likely going to repeal those steel tariffs that the WTO deemed illegal. While this may anger steel manufactures domestically, overall it is a good thing and will do some good in heading off a two-front trade war (Asia and Europe.) With a weak dollar (that appears to be heading lower) it is important that we still have countries that will import our goods, otherwise a weak dollar leaves us with no positives. It appears that the government is realizing this and will make our country more trade friendly. This move will calm some fears and make our trade situation less unstable. We all know that stability is generally rewarded in the marketplace and I would expect this to be a big positive, which may push the indexes higher.
Looking overseas, we can see that Europe is trading higher and that the Nikkei traded up 2.6%. That positive action appears to be spilling over to our markets and the S&P futures are trading slightly higher. As of Friday's close we are about six points away from making a new 52-wk high on the SPX. The magic number is 1062 and while we appear to be on the brink of a breakout it is worth noting that we have failed the last three times we traded at this level. What makes this test different? Well for one we have been here three times before and have eaten away at the supply that lives in this area. Less supply makes for a better chance of a breakout. In my opinion, a strong close above 1062 would be extremely positive and could push us into the 1075 range. The Dow is farther away from a breakout than the SPX and the resistance level there is 9900. Again, a strong close above that level should be a sign of higher prices in the near future. The chart of the NDX looks a bit different but still very interesting. A bull flag (a very bullish sign) has set up and a trade above 1427 should break us out. Resistance in the NDX is at 1450-1453. Overall, the indexes appear to be at pretty critical levels and in my opinion another failed breakout would be viewed as extremely negative. That instance may cause aggressive selling, as funds will try to lock in gains as we approach year's end. This may or may not happen but it is certainly something to keep an eye on.
Looking at the sector indexes the BTK (Amex Biotech) jumps out at me as one that is about to breakout. Near-term the index is in a bull flag and on a longer-term chart we can see it is pushing up against a descending trend line that spans three months. The key level to watch for is 462 because not only is this a break above that descending trend line but also its 50-day MA. A breakout should push the BTK into the 470-480 area. Semis acted well on Friday and the SOX (Philly Semi) closed just under a new 52-wk high. Look for 532 to provide some resistance and 520 to act as support. The banks (BKX) stalled a bit on Friday after six days of strong action. Watch the 950 level as key resistance and keep in mind what a large portion of the major indexes are comprised of banks. The BKX lead the turn in the market in mid-Nov. and could lead the market lower just the same. Just something to be mindful of. The DRG (Amex Pharma) has retraced 50% of its move that was made in mid-Nov and is close to testing its 50-day MA (315.) In my opinion, a 50% retracement that coincides with a 50-day MA usually proves good support and I imagine the DRG will hold here. The Cyclical (CYC) stocks made a new 52-wk high on Friday and would expect them to continue to hold leadership going forward. Lastly, the XAU (Philly Gold/Silver) hit 110 on Friday. On Nov.25 I stated that a push above 105 should push us to 110. This would be its fifth wave in a steady ascent from 95, which began in mid-Nov. Now that we are at 110 do we pullback? I expect either a small pullback or consolidation at this level. With the dollar still weakening we may continue to see money roll into these metals. Keep an eye on that 110 level and watch 105 to act as support.
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