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Breakfast with Brodsky


The question that's on everyone's mind is whether or not yesterday's rally is a change in trend, or a one-day wonder. Breadth was certainly impressive, as was much of the price action we saw. The S&P and NDX seem to have put in a short-term bottom on Tuesday's late session sell off and reversal and now the real test will come in the next few days. With options expiration on Friday we may see increased volatility into that trade but as wounds are beginning to heal from the recent sell off we have to wonder where we are heading next.

This business is crazy when one really thinks about it. At the start of this month there was hardly a bear that was taken seriously. The market (S&P and Dow) was pushing out to new 52-week highs and everyone was feeling fine and talking bullish. On March 8th we hit 1160 and turned around to close on the lows. This started the correction of March and now, after a 5% pullback and bounce in the S&P, we can hardly find a bull.

What has really changed except for technical damage? I, for one, trade off of technicals (and catalyst driven events) so I put an extreme amount of importance into how the market acts because after all, isn't it just a reflection of human emotion? I ask these questions because the lack of confidence at these levels is what concerns me.

Yes, it is true that you want to be a contrarian in the marketplace to make money and to catch the BIG moves. Does this mean to short a stock when everyone is buying? No. It means to buy the market when everyone has fallen asleep and vice versa.

Currently, we have had ONE day of relief and, in my opinion, it is too soon to say whether or not the trend has changed back upwards. Could we scalp trades on the long side and make money? The risk/reward allowed for that late-Tuesday and into yesterday. But if we look at a daily chart of the S&P one could make an argument that wave 1 (down wave) was completed on Tuesday's bottom and yesterday's rally was the start of a shorted corrective wave 2. The conclusion of this thesis leads into a wave 3 which will take out the recent lows and send us into a prolonged correction.

That of course is just one scenario but in my opinion the risk of this happening is great enough to hold off new buyers from really piling into the marketplace. Without an up tick in demand we may have another "trapped bull" situation where everyone is left holding the bag with no bids to hit on the way down (look at market action over the past week and a half.)

Looking at the S&P and NDX from a short-term perspective we can see that a retracment and bounce was due. The NDX lifted and touched its 38% retrace (1432) from the Mar. 5 high to the Mar 16 low. The S&P did the exact same thing and touched its 38% retrace (1125) before slightly fading into the close. A trade above the 1430-ish level in the NDX could spark another rally where 1444 (50% retrace) and then 1456 (62% retrace) would be the resistance levels. The S&P's levels of resistance are 1133 (50%) and 1140 (62%.) A trade and close above both the 1440 level in the NDX and the 1140 level in the S&P would be very bullish and put us back into the trading bands which we were confined to for the greater part of 2004. On the downside look for 1113-1116 to be support in the S&P and 1412 in the NDX. Good Luck.

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