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Breakfast with Brodsky


Panic time is my favortie time....

Good morning. The question that is on the forefront of everyone's mind is whether or not a top has been put in. The market is going through the worst pullback we have seen in quite some time and for the first time we feel some panic entering into the marketplace. Stocks are being sold with nary a lift and it seems that we are still more or less looking to pick a bottom. All the "IM's" (Instant Messages) I received yesterday were asking the same thing, "Where are the support levels for _____(fill in the blank with any index.)"

Of course that is natural to look for support especially when we are pulling back with the most draw down we have seen in months, but this time something feels different. I am not sure if it is the divergences that were highlighted here on Friday and Monday (non-confirming RSI on S&P, Trans failing, Banks rising without overall market following) but with the S&P down 3.4% and the NDX down 4.4% in a matter of three days this is nothing short of painful.

Today we find the futures down again and looking across not only the major indices (S&P, Dow, NDX) but also the sectors we can see that this pullback is affecting everything. Just as everything has been lifting, everything is now falling in tandem. What does this tell me? The same thing it told me when they were all moving together, we are in a one-way market and it feels like the gears certainly have shifted. The S&P made a triple top at 1160, which not coincidentally, is a 50% retracement from the all-time high to the low made in 2002. Now we have something a little more concrete to work with as we change our thinking from buying dips, to selling rallies.

Looking at a chart of the NDX, which has been the weakest index of 2003 (down 9% from its Jan peak) we see that it has entered into its fifth wave of its pullback. For you Elliott Wave fans this is usually the last wave and we may get an A-B-C reversal over the next few weeks. In my opinion, what is important to focus on here is IF we get a bounce and how high it goes. I will keep you posted if and when this develops.

Ironically, now that the other indices have begun their pullback/correction, the NDX is beginning to look the healthiest. The aforementioned five wave pullback has been orderly and we are drifting down into the 1400 area which is where we trading around from October to December. Again, it is way too early to call for a bottom in the NDX's decent but we are at the bottom of its channel (1408 is the bottom and 1486 is the top) and that 1400-1408 area could bring us decent support. Again, this five wave pullback and the channel support theory could be dismantled with a hard breakdown and close below 1400.

Since we have been conditioned to buy dips for almost a year now the first two or three days of any correction are usually rationalized away with the thinking that we are in a bull market and don't worry, demand will enter the marketplace. As we enter into the fourth day of this pullback, with the futures down yet again, you bet there is more panic today than yesterday. Panic is good in the sense that is makes people trade aggressively and often causes reversals. So as we drift down to levels where people are betting that others will step into the market (1115 and 1108 in the S&P, and the Dow looks like it could drop to 10,000) panic will start to set in. Good Luck.

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