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Breakfast with Brodsky


I'm coming soon....

Good morning. So what if anything can we take away from yesterday's range bound action? To me, it reinforced the theory that I have been writing about for a few days that we are in a range bound market and we must learn the discipline of buying support and selling resistance until a trend takes hold again. I know some of you are saying that of course we buy support and sell resistance, that's why we look at those levels with such intensity. That's true, in a perfect world that is how we would act, but there is this little factor that affects trading more than any other single factor, human emotion.

The discipline of being a good trader forces us to remove as much emotion as possible from our decision-making. We set our levels and try our best to adhere to them, regardless of what the overall market is doing. To me, that's when I get in trouble. Stocks may be at levels where I want to sell longs but the S&P may look like a breakout. So instead of sticking to a plan, my emotional greed/hope takes over and sometimes I am left holding the bag. I feel like I am not the only one that this happens to and in this choppy, trading environment, it is better to be cautious and book trades in my opinion.

So where does this leave us now? Well, we hit the top range of our channel and although 1161 (highlighted yesterday as the S&P resistance range) was not touched, it appears supply was anxious to enter the market. People were not looking for the top to be tested and instead took advantage of selling. The media has been giving much attention to the rally that is occurring in the USD (dollar.) Whether it makes sense or not, the rally in the dollar is causing a bit of uncertainty in our market (as to what foreign investors will do) and we all know uncertainty is not rewarded with higher market prices.

The next question we must ask ourselves is if this rally in the USD is a short covering rally or if new, real long money is pushing it higher. I am not an expert in this area and the answer to this question will only come in hindsight, but the difference is truly important for obvious reasons.

The S&P appears to be headed lower - how much lower is the question. The first level of support is in the 1140-1138 area. Below that we can look to 1131 (an intersection of the bottom trend channel support and the 50-day MA) to provide demand. The comparable levels in the Dow are 10,500 as support and 10,675 as resistance.

Again, the NDX is having trouble getting itself going. Every time we feel like a breakout is coming, it fails. It is obvious that the index needs some type of catalyst to get it moving again to the upside and without it, we will continue to feel like we are climbing a slippery slope. To me, I see a bit of a triangle pattern here. By connecting the lows since September we see a trend line that provides us with a current support level of 1460. Combine that with our support level of 1450 and we get a decent floor level where we could see increased demand.

If one were to connect the highs from January and February we see a descending trend line that gives us the top of our triangle. Resistance from this trend line comes in at 1509. Combine that with the 1500 psychological level and we get our overhead area. As more time passes and the triangle lines converge, one could gather that a strong move in one direction will occur. Mind the levels in all three indices and again, in a range bound market keep moving. Good luck.

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