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Breakfast with Brodsky


I told you not to write me off yet....

Good morning. The market acted well yesterday as we were able to open and trade higher, then make a low around the 1462 (NDX) and 1138 (S&P) levels, before rallying to close at the day's highs. What does this tell us? Nothing concrete, but as I alluded to yesterday, it appears that the easy money has been made on the short side for now. Although, I am not totally convinced that we are done going lower. After a five-week sell off in the NDX, I don't think we touch 1450 one time and then bounce back to the highs. In fact, yesterday I don't think I made one purchase (aside from day trades which were put on with the explicit intent of holding for the day). I spent much of the day taking advantage of the bid up prices by unloading stock that was bought over the past two days. I did not add to shorts though because at this point the risk/reward seems to be skewed toward the longs.

It is clear (to me) that we are trying to put in a base at these levels. I am not sure if it is an end of the month bid (although I do not think many people had an incredible month, so why waste money trying to bid up stocks) or if the market has reached levels where demand has truly picked up. Either way the past two days have been better to buy.

We are going to get a look at some economic numbers this morning (Durable Goods, Initial Jobless Claims, New Home Sales) and the most important thing I will take away from this is how they act on the news. I am not so interested in whether the numbers are good or bad but how they are digested. Are we going to see bad news bought again? Or are these numbers going to push us back down to support? The biggest "tell" to me in this business is how news is digested. That tells all. It shows you the market's hand and allows you to trade with confidence.

Looking at the three major indices we see patterns that suggest they may be turning higher. The S&P has been sold five out of the past six sessions and with yesterday finishing higher we look to the 1146 level to provide us with a sign that a breakout could occur. If the S&P can trade above this level we could set off buy stops and the market may trade back into the 1155-ish range. The Dow is making a similar pattern and the key level there is 10,645. Again, no guarantee, but if these levels are pierced on the upside, chances are we will see increased demand enter the marketplace.

The NDX looks completely different. Longer-term support is in the 1450 range and if we trade above the 1475 level we could see buy stops set off which could push us into the 1490 range. This is where we failed last Friday and it is also a 50% retracement from 2/19's high of 1524 and 2/24's low of 1452.

Lastly, an index that I never highlight here, but watch closely, is the S&P 400. This index has been a bull over the past year and often leads the market. The index touched its 50-day MA two days ago and has put in a possible reversal pattern and could be heading higher. A trade back above the 600 level would bode well for equities and is something I will be watching closely. Good Luck.

No positions in stocks mentioned.

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