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Breakfast with Brodsky


Good morning, it was another nasty day in the market as supply pushed us down driven by geo-political factors not to mention a broken market that seems set to drift lower. Lately, it seems as if the bullish outlooks and the calming words of certain market strategists that this is a correction, which should be bought, are being ignored. It's almost as if the market has shrugged its shoulders and is saying, "Tell me something I don't know!"

I believe that is the key to if and when this correction will end. It seems as if the market, mainly the S&P 500, is drifting towards 1060 (38% retrace) and we could get there in time for earnings season, which is believed to be a rosy one. We need something new to drive us and get us out of this rut. We need a catalyst that can wake the market out of this slumber. Is it going to be earnings? Geo-political ease? Currency related? A capture of a terrorist that will make the world a safer place? When one tries to come up with something to "wake" this market up it seems we are racking our brains for something, which may not exist.

With the market having performed as it did over the past year and mirror some bubble characteristics of 2000 (not just price action but also people's psychology), we start to realize how much is priced into the market at these levels. People EXPECT good earnings; we are expecting economic conditions to get better and these expectations were personified in the market action in early January as people piled into the marketplace expecting to be rewarded for this "outlook."

Well it appears that until this outlook is wiped from our minds we will continue to be in a downtrend until the general psychology has been restored to normal and for people to once again not believe in the stock market. For that is when we will again see opportunity on the long side.

Technically speaking, the market continued to breakdown and while we may or may not have oversold conditions, it is hard to find charts, which are not broken and are ready to be bought. Selling bounces has been the profitable trade recently, and I felt that yesterday, for the first time people stopped looking for a snap-back rally and started to panic a bit. This could be reflected in the modestly positive futures picture this morning but I am skeptical of outright buying as this market is still trying to find some footing.

A bounce, if we have a sustainable one, could run into resistance at the 1103 level in the S&P which is a 38% retracement of the recent wave down (1125-1090.) Although this harsh selloff began two weeks ago, the short-term trend has clearly changed and it is my feeling that with such a rocky market and people off to a mixed year, the big money is not yet ready to jump into the marketplace. That being said, short term trading could be the style of choice because the risk/reward set-ups are too skewed to trade with conviction. Good luck.
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