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Breakfast with Brodsky


Good morning. The month of February is turning out to be a tough month for the markets for many reasons. From a technical standpoint, the market should be set to continue its rally. Charts are not really broken, many stocks are still in their uptrends and both short and long-term moving averages have not been violated on the downside. The combination of these factors have made it tough for me to short stocks for any duration of time.

Then last week we had a number of things happen in the marketplace that could change the outlook going forward. Good news was continuously sold in techland, the S&P and Dow broke down from their pennant formations, and the NDX reversed and is again testing support. Also the dollar, which is getting much media attention, began to rally off its lows.

I have been giving a lot of lip service here to the subject about knowing your environment when trading. This current market environment is making me nervous for a number of reasons. The biggest reason for my hesitation is of course uncertainty. A number of geopolitical issues (election year, global relations) are leading us to question where we may be next year in terms of our country's makeup (i.e who will be the President and what policies can we expect.) The market has been unable to rally in the face of a lot of good news that has been released from companies not only in tech but really in all industries. And from a technical standpoint the market appears to be unable to rally to new highs.

Is there too much optimism priced into the marketplace? Is everyone looking for a higher market, which in turn could be making the market venerable to a long squeeze? I wish I had all the answers but looking at how the market has been acting over the past two weeks, something is not right. We SHOULD be rallying, we SHOULD be higher but we are not. What does that tell us? To me it means one of two things. We have been in a time correction throughout February, but now we may be about to experience a price correction.

The S&P formed a pennant pattern from Feb. 10 up until Friday where it broke down through the support area. Does this mean we are going to sell off? In my opinion it is certainly too early to tell. The bottom level of that pennant pattern is support at 1147 (which is now resistance) and if that is broken through look for 1157 to be the next level of resistance. Look for near term support at 1140, which was Friday's low.

The NDX looks much more vulnerable to a continuation of its pullback. After rallying to 1523 (62% retrace from the Jan high to the Feb low) it turned hard on Thursday and sold off through Friday. Friday it held its 50-day MA (1482) but was unable to close above its trendline support of 1488. The NDX does look like it could be headed lower if it is unable to close back above Friday's high of 1493. Good Luck.

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No positions in stocks mentioned.

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