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Breakfast with Brodsky


Is this week over's been a rough one for me...

Good morning. With the futures bid up it appears as if we will attempt to breakout today. My first inclination is to look to fade this picture, for a few reasons. It is interesting how many people were looking to short at the beginning of the week and now those same people are looking to get long. The current action in the marketplace is indicative of range- bound trading. Theoretically, this type of market should be easy to trade. The S&P, NDX, and Dow are all in channels. Many stocks are as well. I like to buy the support levels and sell the resistance levels! In a perfect world, that strategy would be flawless. So what's keeping us back from all trading like that? Human emotion.

People who were short and did not cover at the beginning of the week because they were looking for support levels to be broken, have to be feeling a bit of a pressure (if they are still there after yesterday's action.) Yesterday was clearly a squeeze in many, many good short names of recent time. When you see Whirlpool (WHR: NYSE) up close to $3, you know the squeeze is on!

So now we have nervous shorts, momentum longs that are looking at the breakout of the S&P above 1146, and people who missed the long move and are upset. That's a lot of emotion for a Friday! Remember, in the market, when you have too many people looking for the same thing, if often doesn't work out that way.

A lot of people I have spoken to this week, or read, or heard on television, have been quick to point out the lack of volume accompanying this "rally." When short term trading, or swing trading this is a dangerous rationalization to make if you are on the wrong side of the tape. I have written this before and caught a lot of flack for it but I will repeat it again. If you are short, and have yet to cover because you don't think there is enough volume on the tape and this move isn't a "real" one, I think you need to seriously reconsider your thinking. Lack of volume leads to hesitation. People tend to think that charts don't matter unless there is huge volume to "reinforce" price moves. To me, I don't buy that.

To put that in perspective, I am talking about short-term moves. The last three days for instance. As the market works against shorts on light volume, that means many people have yet to cover. If you are short and are reluctant to cover, how many other people do you think are in your boat? Probably a lot. A lot of nervous people generally does not make for profitable trading. That's why when my stops are hit, I pull right out and never look at volume. You can always re-enter a position, so why fight it?

The reason I bring this up is that I believe we are going to be range bound for some time. This type of environment makes it important to have stops and to trade turns and levels. It is not a runaway tape like we had in December and some of January. Until we breakout of the channels in the three major indices it is important to take trades and keep moving.

The important levels in the S&P are 1146-1150 as resistance. If we are able to breakout above this level then we could go back to the yearly highs. On the flip side, look for support in the 1138-1134 area. A break below here could signify that we are headed for a test of the 50-day MA, which is 1125-ish. The Dow has been a bit heavy and the levels there are; resistance at 10,620-10,635 and support is 10,540-10,500.

In the NDX, look for supply to enter the marketplace in the 1490 area and support is at 1465 and then 1450-ish. Remember it's a Friday and the end of the month so be on the lookout for increased volatility. Good Luck.
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