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Breakfast with Brodsky


Good morning. We wake to find that Asian markets were flattish and that Europe is trading slightly higher, we look at our own futures trying to stage a rally. It seems that after six strong trading days we may be set to consolidate and get used to the new trading range. In the short term we can look at 1060-1070 as the new mini trading range and I think that we could dip as low as 1050-1053 without changing the bullish tone. As I noted yesterday 1070 is a level that has many resistance points (Fibo retrace of 38% as well as significant action at 1070 in 2001-2002) and in my opinion, it is going to take a serious catalyst to get us through that level. Maybe it will come in the form of some unexpected news, bullish earnings reports (which I doubt because everyone is expecting sound numbers across the board) or something on a macro/global scale. Whatever the catalyst is I think it will be more related to fundamentals rather than technicals due to the significance of the 1070 area.

One thing that I wanted to share with you was a trend that I noticed on Monday but didn't point it out because I thought it might have been only a one-day occurrence. Did anyone else happen to see these retailers getting sold over the last two days? Yesterday, we had Best Buy (NYSE: BBY) down over $2, Kohls (NYSE: KSS) down about $2, weakness in Lowe's (NYSE: LOW), Home Depot (NYSE: HD), Radio Shack (NYSE: RSH) was down a buck, and Wal-Mart (NYSE: WMT) got hammered. I normally would not put much stock in this sell off because after the most highly anticipated shopping weekend one would expect the retailers to be priced to perfection but I did happen to note the trading volume over the last two days. Best Buy has had its price sliced by about $4 over the last two days on over two times the average daily trading volume. What's the big deal? The big deal is that everyone is expecting a solid shopping season and that it is already priced in. Could this be the trend going forward? Is this going to be the tone in December? A sell the news attitude? Only time will tell, but the sharp, volume heavy sell off in many retailers yesterday certainly offered us a glimpse. I would suggest watching how this sector acts over the next week to see if they can regain their strong footing that has been a trademark over the past nine months.

The major indexes started off the day strong, but lost their gains at around 1:45 to close down on the day. The S&P could not hold 1070 for the second day in a row and closed right above near term support, which is at 1063. The Dow followed suit and could not hold 9900 and tailed off in the bottom half of the day. The NDX tried mightily to pop above 1450 but failed after three tries in the last two days. It certainly appears that we now need one of two things to happen. We either need to work off this move in terms of time, i.e. trade in this upper range for a said amount of time before breaking out. The other option is that we need a serious catalyst to break us out. In my view those will be the only two things that will propel this market higher. Could this happen? Sure it could. Remember the market is comprised of people and people have a vested interest to keep the indexes near their highs into the New Year. It's that simple.

On a sector-by-sector breakdown we see that strength was in the HMO's, Oil's, and Gold/Silver. The Biotechs (BTK) traded higher all day but reversed along with everything else to close on their low. Support for the index is at 470 and then 460 while resistance is yesterday's high of 488. The SOX has been in a tight trading range over the past five days and some positive news from Xlinx (NASDAQ: XLNX) may spark the index. Watch 534 as resistance and 525 and then 520 to provide support. After eight strong days the Banks (BKX) finished in the red but only slightly. At such a pivotal point in the market the bank action may be significant in helping gauge the direction of the market. Resistance is at 955 and support is at 948 and then 945. The Pharma (DRG) stocks were able to hold their ground and held the 320 level. If 320 fails look for a trade back down to the 315 area. A breakout above 322 should push this group back to its near term highs of 329. Take a look at the OSX and it could be that a triple bottom has occurred in this sector and it may be ready to break higher. Since the market is at a rather pivotal point we may see funds trickle into this sector as it looks like it may break out. A breakout above 86 should push it to 91. Just something to watch. Gold doesn't quit! The metal has held above the $400 level for two days and in my opinion shows no signs of stopping. In the XAU (Philly Gold/Silver,) a break above 112.75 should push this entire index higher. Pay attention to 110 as a key near term support level.

Good Luck.
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