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[Camisa Roxa]

NASDAQ COMMENTARY

We mentioned should the bulls not prove able to recover and reclaim 1380-1400, a test
of 1300-1320 should be in the immediate future, while an ultimate reach down to
1200-1250 would be likely.

We got this test early this week with the low so far of 1220.32 Monday followed by a
low of 1220.21 Tuesday and a low of 1220.35 Wednesday.

The tech market is proving to be rather resilient with nary an actual drop into the
actual support/resistance band. As a result, we expect the market may be able to pull
off a bounce here for a move back into at least the 10dayEMA around 1360, which also
served as the former swing point low on 1/22

In looking at a daily chart of the OTC, we notice the lower high printed at the
mother of all measures of trend in the 200day (40week) EMA, which added pressure to
the bulls and forced a move down to the lows of late December and mid November.

Therefore, it's logical to expect a modicum of support to come from this area.
Additionally, the retracement bulls have the support of the average directional
movement of the market (gray), which is now looking to over come the negatively
sloped positive directional indicator (blue).

As a result, we'll expect a bounce back into the area from 1360-1380 to present a
favorable selling opportunity for a continuation-move lower to the 1200-1250-zone.

Meanwhile, a move above 1380 will bring us to a neutral state until the
1420-1450-area can be reclaimed. This feat will result in a bright new up trend and
is likely to come once resolution is made with regard to Iraq, which may not be till
spring.

Daily Chart of the Nasdaq Composite (COMPX)

OEX COMMENTARY

As for the OEX, we reached our first target on the downside of 440 late last week and
maintained our expectation of reaching down to 400-420.

So far this week the market went on to trade to a low of the 427-mark both Monday and
Wednesday. So far the market has managed to hold this ground just above 425 and just
below 430.

Although it's tempting to simply go ahead and move back to neutral at 430 since going
bearish back at 455-460, the average directional movement of the market (gray)
suggests the bears continue to have full control.

As a result, we're holding out our general bearishness for a move to 400-420, only
expecting a bounce back into at least the 440-level to present the most favorable
reward to risk entry for this setup.

That is to say the market is looking to find support here near the last key measure
of fibonacci support for a bounce back into the descending trend following indicator
of a short-term perspective in the 10dayEMA (red).

The VIX is supporting this potentiality with the ET sell (buy equities) signal
printed Monday. As long as the index holds below Tuesday's high (38.68), the signal
maintains its validity as a buy setup for a continuation-move down to 32-33. All the
while, the ADX (gray) continues to support the bears in the bigger-picture.

Daily Chart of the S&P 100 (OEX)

[Camisa Roxa]

Obviously whenever the President speaks people listen and respond. The same is true
for investors. In fact, many investors put their activity on hold in front of a
Presidential address just to stay out of the way in case the news is bad for their
positions. To those who did wait and respond correctly, they were well rewarded.

I took a look at past January State of the Union Addresses and looked for a
correlation between how investors responded the next day in comparison to how they
responded over the next month. It appears that the investing public shows their
conviction the following day. The next day and the next month went the same direction
71 percent of the time. In the chart below, we've laid out the most recent State of
the Union speeches and indicated point changes on the Dow for the following day,
week, and month.

DOW CHANGES FOLLOWING PRESIDENTIAL ADDRESS

While some would say that the content of the President's speech is what pushes the
market one direction or the other, I'm hesitant to believe that cause-effect
relationship. We have seen that knee-jerk reactions to news, events, and the media
are often short-lived at best. Instead, it's more likely that investors have already
decided (perhaps unknowingly) whether they are bullish or bearish, and are simply
waiting to hear what they want to hear in the speech or the media response.

Yes, there is war looming, and yes, the economy is shaky at best. But as we have
mentioned several times in recent TrendWatches, the market doesn't always do what we
think it "should' do.

The interesting part about his analysis is the size of the jump the next day. The
bigger the gain or the loss the next day, the more accurately the indicator worked.
If we see a triple digit change in the Dow today (or at least high double digits), we
may get a glimpse of what the investing public is thinking in the near future.

[Camisa Roxa]

Early this year we took a look at two different (yet related) January indicators. As
a follow up, today I'd like to review what we saw then, and compare it to what we see
now.

We had first mentioned the first five trading days of January as an indicator in the
January 6th TrendWatch. Basically, if the first five days of the month are positive,
then the rest of the month should be also. In our chart below we can see that the
first five days did indeed push the market much higher. However, for this indicator
to work we'll need to see plenty of bullishness over the next four days. The Dow
Jones Industrial Average closed at 8341.60 on December 31, 2002. As of yesterday, the
Dow was at 7989.50, so we'll need to gain more than 352.10 points by Friday to call
this a valid indicator. With today's bullishness and a strong follow through, this is
certainly possible, but it will not be easy.

The more important January indicator is the one we had mentioned in the January 3rd
TrendWatch. The theory is simply that a bullish or bearish January will likely lead
to a bullish or bearish year, respectively. The target level is the same - the Dow
needs to get to at least the 8341.60 level to go bullish based on the indicator.

DOW JONES AVERAGE - JANUARY 2003

Many people asked why and how this indicator works. First let's clarify that there
are exceptions, but the accurate results are a little too strong to ignore. But as to
the why and the how, I think it has a lot to do with investor's mindsets. If they
look at their first month's results and see a loss, then they throw in the towel,
further propagating the downturn. On the other hand, if they see a gain during the
first month, they are more likely to be net buyers going forward, since they got off
on the right foot. In any case, check the Dow's close on Friday and see if we crossed
8341.60.

[Camisa Roxa]

We've gotten several questions over the last few days about what happened to the
market during the 90/91 Gulf War. We can certainly address this and I think we
should, but first understand that the Daily TrendWatch has no political agenda. It's
designed to be educational and informative in nature, and today will be no different.
Our goal is to present the facts that are relevant, and explain the implications.
That said....

I'm assuming that many of us expect a similar scenario to play out if the
circumstances with Iraq are the same now as they were then. This is a reasonable
assumption, although I would caution anyone against applying the same cause-effect
relationship to such a complex situation.

While the military similarities are uncanny, the social, economic, and political
issues seem to be entirely different. For instance, in 1991 we were fighting with a
coalition of many supportive nations. This time the support is not as strong, and in
some cases non-existent. And while 1990 was not a terribly good year for the market,
the three horrible years we've just been through have investors at an all-time
pessimistic high. The additional worry we're contending with is the political
tension with North Korea. So we're not really comparing apples to apples....at least
not the same kind of apples. In the chart below I've laid out the timeline of the
Gulf War in comparison to the S&P 500. The results were a bit surprising to some. The
lines at the bottom are the AAII Bullish Percentage (in green) and the AAII Bearish
Percentage (in red) readings. (To learn more about the AAII poll, click here)

The most interesting part of the chart is the peak in bearishness in October; the
market hit a low even before the majority of the troops were in place. The other
interesting pattern is that bearishness was increasing in January even as the market
was moving higher. Oddly, the market had pretty much hit its high just when the
bullish percentage peaked in March.

So how do we navigate the market during this time of political conflict and
uncertainty? The answer is in the bullish and bearish opinions. They're the only
"apples to apples" comparison, and it's what investors DO that concerns us most. We
have seen that market bottoms coincide with peaks in fear or bearishness, as it did
in October of 1990. We have also seen that the markets can rally in the middle of
military conflict, as it did in January of 1991. Many people were surprised about
that rally, since it "shouldn't" have happened. The point is, don't fall into the
trap of assuming anything. Use the indicators, and respond to what the market is
doing. Will this time be different? Who knows? But as the chart indicates, things
that seem unlikely are quite possible.