Expect a Test of Recent Lows

The first full week of the year certainly didn't inspire much confidence that the "buy high, sell higher" concept could work over the next six weeks. Due to the fact that the close above the 50-day exponential moving average led to selling pressure instead of a resurgence of new buyers, I am back to looking for the most recent higher lows to hold as such. If the next week can offer a hold above the most recent support in the three indices and close nearer the range highs, then I'll remain near-term optimistic. If the markets close below those supports, we'll have a troubling first quarter ahead.

The markets are going to get hit hard with economic data this week. Retail sales, CPI and PPI data and a sentiment survey from the Wolverine state are all on tap this week. There will be a continued debate about the stimulus package Obama is trying to push through, as well as continued discussions on the price of oil and whether housing is close to a bottom if rates can remain near 5% and below.

All of this should keep the markets locked in the most recent range. If the bulls can manage to hold the lows and end near the highs of that range, it will go a long way to restoring some confidence in sideline money that might offer the concept of "buy high, sell higher" a little higher probability of working out in the near term.

I will be using 850 in the S&P 500 as the important support level. For the Dow, 8420 is key, while the Nasdaq 100 (NDX) needs to hold 1160 on any major pullback. I still want to see more strength in the NDX on a relative basis if the three markets are to pull out of this malaise of congestion that we've been stuck in for the past two months.

I'll be looking for the Monday and Tuesday sessions to try to test support; short-term long exposure can be put on for a move back to the highs of the range. Later in the week should bring the opportunity to take profits in that long exposure for those trading the range. I am not looking for a sustained breakout in the latter part of the week, so those trading the range can be free to bank those profits.

For those of us still looking for higher levels with some core long exposure, as long as the support levels can hold in the next two weeks and keep a higher low formation, then I am still optimistic as long as the most recent highs can be taken out on a closing basis. These next two weeks will most likely be the most important of the year for the bulls if they are to get any shot at some upside to unload some core long exposure into before the second quarter.

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Know what you own: Schumacher mentions the indices. ETFs that track major indices include ProShares Ultra Dow 30 (DDM - commentary - Cramer's Take), ProShares Ultra S&P500 (SSO - commentary - Cramer's Take), ProShares Ultra QQQ (QLD - commentary - Cramer's Take), Diamonds Trust (DIA - commentary - Cramer's Take), ProShares QQQ Trust (QQQQ - commentary - Cramer's Take), SPDR Trust (SPY - commentary - Cramer's Take) and iShares Russell 2000 (IWM - commentary - Cramer's Take).

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At the time of publication, Schumacher was long QLD, SSO and DIA, although holdings can change at any time.

Chris Schumacher is a financial trader, speaker, writer and co-author of Techniques of Tape Reading. While Schumacher cannot offer specific investment or trading advice, he appreciates your feedback; click here to send him an email.