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Al and the Gang



"There's a party goin' on right here
A celebration to last throughout the years
So bring your good times, and your laughter too
We gonna celebrate your party with you"

(Kool and the Gang)

Good morning. While we managed to bounce from an oversold condition yesterday, the market clearly remains focused on the Fed and that will likely dampen the tenor ahead of the 2:15 policy announcement. Collectively, we all know rates are headed higher (at some point) - the key question at hand - is by how much and when?

Traders will closely follow the tone / language in order to identify any subtle or overt changes in policy leanings. Will the Fed shift its bias in recognition that economic conditions have improved? Will inflationary pressures (oil prices / China) impact the Fed's thought process? How much in terms of rate adjustments is already priced in? When would higher rates begin to impact earnings? Is the Fed behind the curve? Only time will tell if the party is near over - but today may provide our first clues of how it may all unfold.

Although yesterday's session worked higher, it was without conviction as traders pared exposure / covered shorts ahead of the Fed. That left the bulls free to roam for a bit. Accordingly, volume flows, which had picked up in recent sessions, were on the light side with 1.57 bln shares changing hands on the Big Board and 1.90 bln shares on the Nasdaq. Advancers outpaced decliners 1997 to 1316 on the NYSE and 1718 to 1440 on the Nasdaq.

Oil climbed thru $38 / brl on the heels of uncertainty and terror attacks in Iraq (highest level since 1990). The increasing outrage over the misconduct of a handful of U.S. troops hasn't done much to alleviate the tension in Arab countries. In any event, the incident is an unnecessary and unfortunate problem at a very tenuous time in the region and the global response will likely impact sentiment.

The oil sector reasserted leadership in yesterday's trade and the AMEX Oil Index (XOI) and Philly Oil Service Index (OSX) both climbed over 2%. Resistance on the OSX stands at 107 resistance 107.80 with 110 overhead while support lies at the 50 dma (104.87) / 103.92. Support on the XOI rests at 600 / (50 dma) 596.57 while resistance remains at 620.53 (recent closing high) / 623.53 (intraday high). For their part, the transports (TRAN) hitched a ride higher after the recent weakness and were up +1.3%. Nat Gas (XNG) was also higher rising +1.93%.

The chips continued their dip and although they bounced off the session lows, the action remains ugly at best, as the group still managed to close at six month lows. The semi's had provided leadership on the way up and without their support the Nasdaq could remain soggy. Whatever the case, the group is very oversold right now and that is battling the fact that the group is largely carried by sentiment (which is simply poor at best right now).

I continue to keep an eye on the biotech space after the recent action as we clearly saw a near-term top in sentiment with the OSI Pharma (OSIP:NASD) spike. Yesterday, after the recent weakness, the group got a relief rally. I had wondered in the run-up when companies would use the opportunity to raise capital. As I noted on the Buzz, Imclone (IMCL:NASD) was the first to pull the trigger as they announced a $400 million convertible offering. The FDA's notable rejections yesterday, along with Cephalon's (CEPH:NASD) weak report may set the tone for the biotech tape. DB has their healthcare conference today so we'll have to see how the cheerleading affects trading.

Chart Check...

Nasdaq at the 200 dma (1934.73), Big Blue (IBM:NYSE) hovering at recent lows testing Nov '03 low (87.72), REITS (RMS) eyeing the 200 dma (569.42), brokers (XBD) right on the 50 dma (129.48), biotechs (BTK) staring at 50 dma (536.67), dollar index (DXY) on the 200 dma (90.77), General Electric (GE:NYSE) testing the 200 dma (30.46)

We've got a number of other events on the trading radar...

As always, we'll scan the action and highlight the relevant info as it all unfolds. Good luck.

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No positions in stocks mentioned.

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