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Breakfast with Brodsky


Finally I get some love...

Good morning. It seems as if our recent reservations in the market seemed to have somewhat paid off yesterday as the broad market had a harsh pullback led by the SOX. After attempting to breakout of the 510 level, the SOX reversed and began a slow grind with hardly a bounce which consequently dragged the entire market down with it. It seems that in light of the tight trading range and the mixed news which has been released on this group over the past week, the SOX was set up for a long squeeze and that is exactly what we had yesterday.

About two weeks ago, I opined that the markets were confined to trading bands and I listed the support and resistance of said levels (which are changing every day due to the fact the channels are angled.) Those bands have yet to be broken and as we drift lower we are now getting closer to the support levels of these ranges in all three indices.

Let's take a look at the NDX. The index drifted lower yesterday without lifting significantly and closed at 1441. This level is significant because it is the first time we closed below the important breakout level of 1450 that we traded through in late December. So where does this leave us now? The NDX is now drifting lower towards the bottom range of its trading band and we can look at 1420 to provide support, if we get there.

The Dow is also moving towards the bottom of its channel where we are looking at 10,500 as the first support level and then 10,400 as the second. A quick look at the S&P shows that on a relative basis it is holding near the top of its channel. Look for 1137 to be the first support level and 1128 the second level which is also the bottom of its trading channel.

The lack of positive catalysts and the fact that all news is being sold leads me to believe that this correction may not be over yet. Just like in late 2003 where we drifted and grinded higher, the opposite is happening now in the NDX. That can be a dangerous trap for longs who wait to sell into bounces, because they may not come. Look at an intraday chart of the NDX yesterday which illustrates my point. The S&P has a slightly different story and has been trading sideways for much of 2004. The bottom-line to me is that while the market's action was certainly nasty yesterday, I do not believe that we have topped out. Again, we are range bound and one must respect the market and its ranges. Keep moving and keep trading. Good Luck.
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