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Breakfast with Brodsky


Good morning and boy was yesterday a nasty day for the markets. Tech was bid up to start the day, lead by Applied Materials (AMAT: NASD), which was unable to hold its gains after releasing positive earnings. This lead the SOX lower through the resistance level it had pierced above and it closed on its low on high volume. All in all, yesterday's action felt pretty negative as many stocks were unable to hold on to their early gains and reversed on heavy volume. Is this a function of the expiration that is occurring today? Possibly, but I also think that the market may need a combination of some more time and a catalyst to carry us higher.

On a technical basis, the Dow broke out of its pennant formation early in the day but quickly reversed and closed on the low level of that formation. If 10,650 is broken, we could see 10,580 and then 10,500 on a pullback. The S&P tried to breakout to new highs but failed at 1058 (which is where it has failed throughout much of this month). Is this pullback going to be another shakeout, only to bounce back? Only time will tell, but watch 1145 for the first level of support and then 1136.

The chart of the NDX looks pretty negative to say the least. It tried to breakout but reversed and closed right above its 50-day MA of 1481. This level has not been decisively broken since mid-December where it bounced back and resumed its uptrend rather quickly. Will that happen again this time? Is the environment different? Well, in many ways, it is. The number of new highs is falling, breadth is pretty negative and it is apparent that we need both more time and maybe even lower prices to bring more buyers into the market.

Taking a look at the sector indices, we see some pretty telling information. The BTK was unable to hold above 540 and reversed some. Overall, this index does not look so negative to me. Could it use a breather? Sure, but this is a sector that has demonstrated positive market action and many positive news announcements. Watch for a similar correction, if one is to ensue, that could mirror the one we witnessed during the second half of January.

The chart of the SOX is still in no-man's land. After yesterday's failed breakout, we can assume two things are going to happen. First, longs will continue to sell and the second thing is that this area will be targeted by short sellers. Between AMAT's negative action, Intel (INTC:NASD) on important support at 30, and a whole host of semi-related charts looking negative, this is shaping up to be a battle in this sector. The SOX closed on its 50-day of 514 and a break of that could send the index down to test the 500 level.

The Banks (BKX) and Broker/Dealers (XBD) faltered some and we should watch the 1000 level in the BKX. If that level is broken, we could see a trade down to the 993 level. The XBD looks like it could need more time before traveling higher but it does have support in the 720 area.

The Oils (OSX and XOI) stalled as well and are both at pretty critical junctures. The OSX has pulled back to the 105 area (which is where it broke out from not too long ago). This index could need more time before making a move higher. The XOI is still hanging on to its highs at 580. A failure to hold this level could push it back down into the 560 level.

The DRG (Pharma) and the NWX (Networkers) have been under pressure over the past few trading sessions. The DRG did break a trend line yesterday that stretched from the November low through the dips in January. Will money find its way back into this sector with tech under so much pressure? After such a dramatic move in the NWX, the index has retraced 50% and does seem a bit range bound between 287 and 300.

All in all, everything looks like it could be vulnerable to a pullback here. Over the past year or so, it has paid to buy these junctures as the market has refused to crack. Is this going to be the one? Is the boat loaded too much to the long side? Only time will tell. Good luck.

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No positions in stocks mentioned.

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