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Breakfast with Brodsky



As we begin March, one can't help but look back on the past two months and notice the range bound trading activity that has marked 2004 thus far. A look at the charts of the S&P 500 and the Dow clearly illustrate that the market is taking a breather and has entered one form of a correction phase. People always assume that a correction must take place by a decline in price but that is not entirely true. A market, when in a strong trend (the current one being up) can correct by staying stagnant over a period of time. The current pause has lasted almost two months in the aforementioned indices and one must now begin to wonder when, and if, a resumption of that overall trend will continue.

Since we "topped" out in the S&P and Dow in mid-February we have seen a series of declines in price but not so much in investor enthusiasm. People are still very much bullish, corporate news has been somewhat positive (although most of it is still being sold) and with today's release of the ISM numbers, we will get a glimpse into the health of the manufacturing sector.

The NDX, which is basically a barometer of technology, has fared much worse so far in 2004. After a tremendous run from 1400 (mid-Dec) to 1557 (mid-Jan) the index has been in a distribution mode led down by the semi sector. The SOX has declined a bit more than 12% from its Jan highs and has held the 493 level twice. It is a bit early to call for a double bottom but this beaten down sector will get a test today with a downgrade by JP Morgan. The bank has downgraded the entire semi sector as well as Intel (INTC: NASD) to a Neutral from Overweight. If this news is "bought" one could make the argument that most of the bad news is priced into these issues. I will be watching the action here as a market indicator.

With the three major indices still in a range (SPX: top, 1159, bottom 1127: Dow: 10,760 and 10,490: NDX: 1512 and 1431) we are not out of the woodwork yet. Friday's end of the month action failed to close the S&P and Dow at their daily highs and left the chart patterns looking lower to me. The NDX could come back and test that 1450 area which in my opinion would be healthy. One thing I must point out is that the 50-day MA's of the S&P and Dow both intersect with the bottom of the trend channels I highlighted above. Over the course of this current bull, any test of the 50-day MA has proved to be a great entry point on the long side.

With no clear breakouts or breakdowns in the individual sector indices, I instead will focus on the overall market action to guide my trading. Again, I must point out the channels we are in and the fact that it appears we are in a "trading" market and not a trending one. Taking trades, and jumping in and out of stocks and indices has been my strategy for the past couple of weeks. This will remain my focus until we decisively breakout or breakdown from the current levels and a trend will resume again. Good Luck.

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