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Breakfast with Brodsky

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I was doing so well!

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The bleeding continues, as it is clear that the sell off is not done yet. The recent market action, while down, is reminiscent of the action we experienced last August. In August of 2003, we were coming out of trading sideways for two months, and many still did not believe in the bull of 2003. So in August, as we broke out of the trend and moved higher, there were a few characteristics that remind me of today's market action.

The number one similarity is the fact, that just like today's tape, we are grinding in one direction. We are not gapping down hard on a daily basis. We are opening and steadily moving lower throughout the day. This makes it extremely tough to trade if you are on the wrong side of the tape. For instance, if a stock that you are long makes a gap down opening, you may be apt to turn and sell faster because perhaps your stop is taken out. On the flipside, if a stock you are long opens flat to down small, you may be inclined to say, "I will sell into the next bounce." Of course, this tape is not giving us any bounce and a stock that started the day down $0.40 is soon down $1.40 and that's when people start to get emotional.

The market was doing this to the shorts back in August, which caused the market to grind higher over the course of a month without much of a pullback. The current action is very similar. People are still looking to buy dips even though the market is telling us that may not be the best course of action right now.

So where does that leave us now? In my opinion, there seems to be a lot of emotion at these levels. As the tape becomes increasingly difficult to trade, people become more and more irritated. It could be performance anxiety, the loss of capital, or just the frustration of having no feel (I have felt all three and they are not good feelings,) but whatever it is we will start to see exaggerated moves. Shorts will try to come in and press the market. Longs that have been ridden down over the past few weeks will become close to their stop out and this makes the potential of a snapback rally extremely high.

Looking at the charts of the S&P, Dow and NDX we can see that they are in trading channels. As we move closer to the floors of these channels we could see some demand enter the marketplace. The levels that I have identified as support in the three indices are as follows: 1126 in the S&P, 10,480 in the Dow, and 1440-ish in the NDX.

Looking at the sector indices we can also see a few are moving towards some trending channel support. The BTK has been trending higher since its bottom in November and is approaching the support level of the channel. Look for demand to come in at 523-520 in this index. The SOX looks pretty ugly and could be headed lower. The close below 500 is not good and the next level of support is the 478 area.

The banking index (BKX) is close to testing trendline support that stretches back to September. Look for support to enter the marketplace in the 994-990 area. Drugs have been grinding lower and the cyclical stocks are about to re-test their 50-day MA of 680. With the banks and cyclicals at critical junctures, we may want to look to them for any decisive breaks that could drag the entire market lower.

Looking at a few "defensive" sectors, we see the XOI grinding higher to new 52-week highs. The OSX is also consolidating near its 52-week high. The CMR (Morgan Consumer Index) is making new 52-week highs and is grinding higher on a daily basis. Meanwhile, with the USD rallying some, we have seen the XAU pullback 8% over the past four trading days. We are nearing support at the 95 level. Good Luck.



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No positions in stocks mentioned.

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