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Talk about market schizophrenia! Market goes down, market rebounds all the way into the green. Market drops back ahead of UN weapons inspections report. Market sinks hard. Market bounces. Sound like nervous investors?

Hans Blix's report to the UN cited cooperation from the Iraqi's as far as access, however, also referred to deficiencies in substance of cooperation with the UN. That substance included providing information and allowing private interviews of Iraqi scientists. Blix said "Iraq appears not to have come to a genuine acceptance, not even today, of the disarmament that was demanded of it." Blix spoke about discrepancies between what the inspectors know and what was reported to them. The U.S. response came from Ambassador John Negroponte, who said that Iraq's inadequate weapons declaration did not address even the most basic issues of concern. He also said that the last 80 days have proven that Iraq is back to business as usual and there is a danger that the UN Security Council will go back to business as usual as well. White House spokesman Ari Fleischer said that if Iraq is only partially complying with the UN mandate, then the answer to whether it is complying is NO. It basically sounds as though the U.S. is setting the stage to invade with or without the U.N.'s approval.

The markets certainly felt that was the case, as we held steady for a brief period during Blix's speech and then fell fast on the U.S. response. Not only did we head below the day's lows, but we broke the important support level in the Dow of 8000, trading as low as 7957 intraday. Friday's drop below Dow 8200 suggested the breaking of a neckline in a head and shoulders pattern formed in the Dow since late October, early November. The next level of support below that neckline appeared to be Dow 8000 and that level has fallen on an intraday basis. We did rebound back over 8000, so traders can watch the close for more definite signs of ongoing sentiment. The measuring objective of the H&S pattern is approximately Dow 7500 and so far nothing in the equity markets has occurred to suggest that objective will not be filled.

The bond market, however, is a different story. As the morning has worn on, the yields still remain positive, which is a bullish sign. That would our first diverging signal. The other diverging signals are coming from the U.S. Dollar, which has rebounded slightly after sinking hard over the last few days, up slightly on the day. The U.S. Dollar Index still remains below 100, trading 99.23.

Gold, which has benefited from the slide in the dollar and war fears, continues to build on six-year highs. Gold futures (GC03G) traded as high as 373.7 this morning and were trading 371.2 as of this writing.

Almost every Dow stock was in the red, with the only exceptions being Intel (+0.08), Wal-Mart (+0.15) & SBC (+0.46).

The Nasdaq Composite and NDX, which were the only major indices still holding gains from the year, have erased almost all of those gains. The COMP finished December at 1335, while the NDX finished at 984. The COMP has taken out those lows, currently trading 1329, while the NDX is sitting just over that number, trading 990.

The Semiconductor Index (SOX) is also flirting with a significant support level. The 280 level provided support and a big bounce on a pullback during the big run from October to December. The SOX tested that level this morning and has so far held above it. A breakdown of that level could signal another trip into the low 200s, which would coincide with the Dow and SPX testing October lows. The SOX is currently trading 281.68.

Traders can watch the retracement levels highlighted in John's 11:00 update for signs of intraday support resistance. We are bound to get additional schizophrenia as traders try to guess how the Iraq situation will unfold. However, one thing to keep in mind is that the direction over the last couple of weeks has been down and the news from Iraq has not really changed anything we saw previously.

Steve Price

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