Expect Gains -- and Volatility -- From NDX in 2008

Most investors would like to forget about the fourth quarter of 2007. But traders yukked it up with all the volatility, 10% retracements and gap-filling targets. The first quarter of 2008 should be no different.

The past few years have centered around global growth, emerging markets, housing issues, energy prices and the green initiatives. I expect 2008 to center on consumer spending. The debate about a recession is huge, and the key economic reports, at least for the first part of 2008, will be employment data, retail sales and consumer income/spending reports. Investors want to know if the American consumer finally is saying "enough" and will slow spending.

One thing I can say after working with clients over the past two years in putting personal budgets together is that while they may want to slow spending, the majority of them simply can't. Something has to jolt them into slower spending.

Gas prices at $4 won't do it; they still see this as an incremental increase in expenses. Increases of 10% to 15% in food costs won't do it, either; again, that's incremental.

What will slow consumer spending is a decrease in access to credit, higher foreclosure rates that cut off further access to credit and job loss or a major personal disability that won't allow an income to be generated. These are major life events.

In aggregate, I'm mostly worried about the employment data moving forward.

Fortunately, tech has the ability to withstand some of the recessionary fears because of global growth. I will still look for gains in tech in 2008, although volatility certainly will continue to be high.

The next major resistance bar on an NDX monthly chart is 2627, which was a February high back in 2001. I would love to see the index reach that level in 2008. If fears of a recession are abated based on reasonable job growth along with continued global growth, there is a higher probability of testing this resistance level.

Moving back to the present, I'll look for the bears to press the bulls early this session and push the index back to the unfilled gap near 2065. Because a lower high has been made under 2150 during the past two weeks, the bears have a slight edge -- albeit on lighter volume.

I would like to see 2065 filled this week ahead of the employment data. Then I would love to see the employment data in-line or stronger than expected to help push the index back to a retest of the 2140-2150 resistance area before the end of the following week.

We also have data on existing-home sales and ISM Services this week. Those reports could help create a little distribution pressure ahead of the employment data on Friday.

Be safe tonight and enjoy a great New Year's celebration.

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At the time of publication, Schumacher had no positions in any of the instruments discussed in this column, 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.