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Setback after higher open

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It has been a reversal of fortunes for U.S. equity markets after a higher open as investors digest last night's news that Iraq officials had agreed verbally to let U.N. weapons inspectors back into the country with no conditions attached.

While that news was received as bullish, with some investor "uncertainty" as to Iraq's eventual actions, this morning's economic data perhaps have bears just enough "hope" that current support levels in the major indexes might be broken as economic data had August's industrial production declining by -0.3%, which was below economist's forecast for a 0.2% gain. Some economists feel that August's decline may not be that concerning, when considering that July's previously reported industrial production of 0.2%, which was revised higher at 0.4%, creates a "wash." Economists still are viewing the record low inventory/sales ratios as hopeful data that August's decline is an aberration.

Technicals have the Dow Industrials (INDU) 8,288 -1%, recovering about 38 points from a morning low of 8,250. Traders will note that the recent relative lows dating back to September 5th, have found technical support at these levels on intra-day and closing basis. In essence, technicals continue to hold support in the Dow Industrials currently.

Similar to the Dow Industrials, the S&P 500 Index (SPX.X) 883 -0.87% holds above horizontal support of 879, and here too we see the recent three-session lows of 877 holding firm. This morning's relative low in the SPX came at 880.

Volume is brisk at both the NYSE and NASDAQ, but not necessarily heavy. Yesterday, both markets traded rather light volume near the 1 billion, and current volume levels have the NYSE pushing the 816 million shares traded, with NASDAQ heavier at 935 million shares traded.

Breadth is negative at both the NYSE with the big board showing decliners outpacing gainers by a 9 to 5 margin, while NASDAQ breadth is modestly better, with decliners outnumber advancers by a 9 to 6 margin.

New highs versus new lows indications is weak, but the NYSE shows 32 stocks hitting new 52-week highs versus 89 stocks hitting new lows, while NASDAQ shows just 23 stocks hitting new highs versus 132 stocks at new lows.

Technology strength is fractional with the Biotech Index (BTK.X) 338 +1.26% showing gains. Shares of Genzyme Corporation (NASDAQ:GENX) $20.72 +3.85% shrug off weakness for a second session after the company lowered Q3 and full year guidance yesterday. Bullishness here may be related to next Thursday's FDA review for the company's Fabrazyme drug. Sector bellwether Amgen (NASDAQ:AMGN) $45.53 +0.52% holds the $45.00 level, which has open option interest heavy at both the Sep. $45 calls and puts, which may be a "peg level" headed into this weeks triple- witching option/futures expiration.

Sector weakness on the session is found in the Oil Index (OIX.X) 268 -3.18%, as some of the "war premium" may have been removed after Iraq agreed to U.N. weapons inspections.

While weak, both "defense" indexes aren't getting pummeled as the DFX.X -2.62% and DFI.X -3.3%. Yesterday we noted the DFI.X had rallied right up to its 200-day SMA of 590.65 and closed just below at 590.31. Moving average support is now monitored at the 21-day SMA of 565.33 and then a rounding out 50-day SMA of 555. Traders/investors in other "defense-like" stocks may want to correlate their holding against the moving averages found in the defense sectors just listed.

After selling at the open in Treasure, we've seen a reversal back into the red in YIELDS. Yesterday, the benchmark 10-year YIELD ($TNX.X) looked defensive into the close with a low YIELD of 3.851% and a closing YIELD of 3.874%. A break below either of these YIELD levels may be further signal of weakness in stocks.

Index traders may correlate a YIELD break in the 10-year ($TNX.X) of yesterday's low, to get some confirming breaks lower in their indexes that they are monitoring.

Jeff Bailey
Senior Market Technician
Option Investor

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