Toward a Recovery

Markets failed to offer the upside movement off of range lows last week as further negativity in the headlines pressured markets. It is hard to overcome uncertainty about the stimulus plan combined with weaker earnings out of Microsoft (MSFT - commentary - Cramer's Take), doubts of the dividend in GE (GE - commentary - Cramer's Take), lower GDP reports out of Europe and China, and companies like Samsung posting their first-ever quarterly losses. Again, one has to wonder when all of this negativity will truly get priced into the markets -- now or at lower levels.

For now, the market has been able to withstand a lot of bad news, and the indices have held recent supports. The one thing I never liked when I was looking for bullish price behavior was a base near lows. That tends to lead to lower lows. If the bulls are to get something going to at least hold the November lows, they'd better get in gear and at least put in a higher low above the most recent resistance levels sometime this quarter. I can't imagine we'll stay rangebound over the next two quarters.

For the Nasdaq 100 (NDX), that needs to be a move over 1285. The S&P 500 needs to clear 950, while the Dow has to finally close above 9200. Until those three things happen, the indices are in clear jeopardy of breaking 2008 support levels, leading to more forced selling. This could easily bring the Dow to the 6000 level that has most investors worried right now. I am at the point of past worry and into the zone of "just do something, already." This constant grind between Dow 8000 and 9000 is beginning to drain on the psyche of many investors, me near the top of the list.

As I think about what can possibly go right in this environment, I have put together a scenario that begins with unemployment. I continue to believe that companies have put themselves in a better position through all of this by at least anticipating a recession and preparing in kind. Given that none of the companies prepared for a financial meltdown, I would love to see unemployment spike up this quarter to 8% or 9% and then stabilize. This should help Americans feel better about their career prospects for the remainder of the year (at least for those who still have their positions). This will be the first step to stopping the slide in consumer confidence.

The second step will be to see mortgage rates stay low as people become less fearful about losing their jobs. If this happens, many consumers will trade up to that bigger home or finally take the plunge and buy that first home. With new home starts waning, this will help to get rid of inventory and finally put a floor in housing prices. As with the stock market, investors won't start buying until housing prices have already begun rising again. If housing prices stop falling and people feel better about jobs, that would help improve the psyche of the consumer and hopefully improve consumer confidence numbers.

This scenario would go a long way toward a recovery in the second half of the year. But first things first: The most recent lows need to hold, and we need to get past the first quarter without violating those lows. A close above the most recent highs would strengthen the argument that all the bad news has been priced into the current range. This week I'll be looking for the same closing values I did last week -- I would like to see the Dow above 8400, the S&P 500 above 875 and the NDX back above 1240.

---

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).

---

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.