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Of their lows, but still lower

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The major indexes are up from their session lows, but still show a lower trade as investors come to grips with the fact that war with Iraq isn't going to be as easy as it first looked last week when coalition troops first stormed into Iraq making quick progress, but have reached greater Iraqi resistance near Baghdad.

The Dow Industrials (INDU) 8,138 -1.1% fell to a session low of 8,104, but firmed up in a "range of support" from 8,099-8,120 on what I believe to a an area where some "old bears" are most likely closing out some positions after last week's impressive rally to the 8,500 level, where many traders might not have envisioned a rally extending itself to. Dow breadth is decidedly negative again this morning with just 2 of the 30 components showing a gain as McDonalds (NYSE:MCD) $14.58 +2.45% and Merck (NYSE:MRK) $54.66 +0.34% buck the trend of early morning weakness, while shares of Alcoa (NYSE:AA) $20.30 -2.3%, American Express (NYSE:AXP) $34.34 -2.3%, Walt Disney (NYSE:DIS) $17.17 -2.6%, International Paper (NYSE:IP) $34.55 -2.97% all sport losses greater than 2%.

The broader S&P 500 Index (SPX.X) 862.63 -0.84% shows a 7-point decline after falling to a low of 858.09 and piercing its 50% retracement from its October lows to December highs as many of the sectors we monitor on a daily basis show declines. Oil Service (OSX.X) 84.75 +1.62%, Natural Gas (XNG.X) 166.67 +0.99%, Biotechnology (BTK.X) 343 +0.71% and Internet (INX.X) 103.78 +0.78% are sectors bucking the lower trend of Gold/Silver (XAU.X) 62.27 -2.5%, Forest/Paper (FPP.X) 259 -2.56%, Semiconductor (SOX.X) 314 -2.2% and Networking (NWX.X) 144 -1.97%.

Weakness in technology sectors has the narrower and more heavily weighted toward tech NASDAQ-100 Index (NDX.X) 1,055 -1.06% lower by 10 points, but still holding above Monday's lows of 1,045 and our WEEKLY S1 level of 1,040.

Treasuries continue to find buyers, but we have seen some selling come in after YIELDS reached morning lows, and action here appears to mimic action seen in the major equity indexes. On key technical level that looks to be in play in the Treasury market is found in the shorter-dated 5-year YIELD ($FVX.X) 2.862% after a morning low YIELD of 2.834% found sellers right at its trying to round flat 50-day SMA. Also found at the 2.834% YIELD level is extended downward YIELD trend that was broken to the upside on March 18 at 2.914%, with the extension of this trend now serving up correlative support with the 50-day SMA. It would be my view that if the 5-year YIELD can find selling support (keep YIELD at current level or higher) this type of action would bode well for equities. It is my thought that the shorter-dated 5-year YIELD is the "safest" YIELD when compared to the 10 and 30-year and any lack of further buying in the shorter-dated Treasury would be hint that the MARKET is "comfortable" with current scenarios in play as it may relate to the war effort and economy.

I wanted to quickly show a chart of McKesson (NYSE:MCK) $24.88 -1.69%, which is a stock I've profiled as bearish in recent weeks and currently hold in my own account. Yesterday, I was looking to close out 1/2 of a bearish position held, but decided against that action after receiving a "downside YIELD alert" from the 10- year bond. However, yesterday's action saw the broader healthcare sector bullish % (BPHEAL) from Dorsey/Wright and Associates reverse back up into "bull confirmed" status, and raises my alert to pending strength in the sector, and perhaps one of the weaker "healthcare-related" stocks I've been focusing on.

McKesson (MCK) Chart - Daily Interval

I first profiled shares of MCK as bearish when the stock broke the $25.00 level and triggered a "bearish triangle" pattern on its point and figure chart. At that time, the S&P 500 Bullish % ($BPSPX) from Stockcharts.com was in "bull correction" status and the sector bullish % for healthcare was also in "bull correction" status. MCK fell quickly to the $23.00 level, but as the market and sector has rebounded, so have shares of MCK.

What I like to do when holding a bearish trade in a weak stock, where the MARKET and SECTOR internals begin to show improvement is "plan for the worse" and begin to think that the rising tide can lift all boats. To try and "fine tune" an exit strategy, I've taken a retracement level on MCK's bar chart and "fit" it to some levels I deem significant. My original plan was that MCK had and may still have downside potential to a bearish vertical count of $14.00, so I've anchored retracement at that lower end. To get some "levels" that fit past trade, I've attached the upper end of retracement back to a relative high of $31.99.

With the sector bullish % now in a bullish phase, I'm suggesting that bearish traders holding a position snug a stop down just above the $25.11 level, but look to close out partial bearish positions on weakness below the $24.00 with the sector bullish % turning more bullish. This type of trade still allows for downside potential in a stock that I view as very weak, but protects a trader against the possibility that the renewed bullishness in the sector and MARKET as depicted by the S&P 500 Bullish %, provides caution to the trader.

Jeff Bailey

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