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Breakfast with Brodsky



Good morning. I woke up this today and turned on the TV, as I do every morning, and I heard some mumbling about the market on CNBC and then I heard it. It has probably been talked about for quite some time and either I have been turning a deaf ear or subconsciously using selective hearing. But there it was. Plain as can be and I got a flashback to the frothy days of late 1999-early 2000. What is it you ask? What would ruin the start to an otherwise pleasant day? One simple question. That's all it took. That question is: "Can the Dow break above 10,000 and the NASDAQ break above 2000?" That seems to be on the forefront of everyone's mind. I don't have to remind everyone that this question was asked in early 2000 repeatedly. The numbers may have been different but the mindset; peoples' psychology is exactly the same.

No one will deny that this run has been fantastic and whether it is over or not remains to be seen. In terms of supply and demand the market seems fine. Most selling has been light and every correction has been met with buying. But red flags are popping up and people are ignoring them. A smart man once told me that two things drive the market; fear and greed. Right now people are more fearful of missing out on the next move up (if there is one) and are greedy for more gains. This causes people to rationalize "red flags" instead of paying attention to them. A big red flag to me is when CNBC starts off the day with that question mentioned above. A big red flag to me is when I mention anything bearish to friends of mine and they get super defensive. I have been bullish all year long and on many levels remain so. But the market is bigger than any of us and when clues start to arise one must pay attention or pay the price. I am just trying to bring this to your attention and I welcome all thoughts on this subject matter!

Before you start in with me about how things are different this time allow me to retort. Things are always different! Otherwise we would have no progression as a society, a people, or even in the marketplace. But take a look at what doesn't change, people's motivation, people's emotions, and people's perception of the marketplace. Throughout history we can see that history does repeat itself and in retrospect the one clue we had that it was going to happen was watching people's behavior. After all, most things are driven by us humans, but yet people refuse to acknowledge it. They refuse to accept that some things are out of their control and will fight to the last breath to defend their position. There is a time and place for that but certainly not in trading the markets. One must be able to scream at the top of their lungs about how great something is, then switch their position on a dime! Most people cannot do this. Most people cannot allow their ego to be bruised. Personally, I would rather make money and have a bruised ego!! Just keep this in mind while trying to remain objective in this market.

Yesterday's action in the major indexes was not too positive in my opinion. After two days of selling off in mid-afternoon, we appeared to have gotten past the "1:30 sell-off" and instead double topped at around 2:00 before reversing and closing on the lows. Once again, the S&P could not hold above 1070, sold off, broke a four-day trend line and closed at 1065. A trade back above 1069 would put us back above that trend line so watch that level carefully. One thing I did note in yesterday's action was that the S&P and the Dow (not as strong in the NDX) both made a gravestone doji. This is where the market reverses from its highs and closes on its lows thus giving back the entire day's gains. This is a bearish candlestick signal and since it is a technical indicator, it is not 100% accurate and could end up meaning nothing. A quick look at support levels in the S&P shows us that 1064 is the first stop, then 1057 (38% fibo retrace of Nov low to yesterday's high), and then 1052 (50% fibo retrace.) The NDX was unable to break out to new 52-week highs again before sharply reversing. Support is at 1415 (38% fibo retrace) and then 1400 (50% fibo retrace.)

A quick rundown of the sectors does not show us much strength anywhere. Looking at the BTK (Amex Biotech) we see that 480 failed to hold and the next level of support is 470 which is where the index did a lot of work in late October and also its 38% fibo retrace level. A break there, in my opinion, would push us down to the 460 area. The SOX (Philly Semi) broke down from its trending channel yesterday. All eyes will be on Intel's (INTC: NASD) mid-quarter update tonight and it will be interesting to see how the news is digested. Look for support in the SOX at 514 and then 507 and resistance is at 533. The Banks (BKX) finished the day in the red and under the 950 support level. Next support is at 944 and then 940. Resistance will be at 953-955. The retailers continued their slide, closing the day on their lows. The IRH (Amex retail) is approaching the 90 level where it held in October and November. Watch that as key support. The DRG (Amex Pharma) reversed in mid-day but was able to hold 320. In my opinion, a break below that level will push the sector back down to the 315 area. The Cyclical stocks were able to hold up well along with Defense names. Gold/Silver (XAU) has been trading in a tight, confined area. Look for support at 110 and a break above 112.75 should send this index higher.

Good Luck.

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