Key on the Moving Averages

Upside targets during the holiday week were met as the Dow blew past the 8300 level and the S&P 500 and Nasdaq 100 (NDX) met their levels of 870 and 1170, respectively. I maintain that while these levels were met during the holiday week on lower volume, it is the upcoming week that matters as we head to the top of the order of economic data. If the markets can maintain the higher levels of last week ahead of what will most likely be further deteriorating economic data, I'll be much more hopeful for higher levels by year-end.

I have been waiting patiently over the past two months for the indices to reach back to their 50-day exponential movie averages (50EMA). The last time the 50EMAs seemed to have a chance to flatten out was when right after the election. The failure after that was disheartening, but the landscape appears to have changed quite a bit since the beginning of November. If the indices can manage to close above their 50EMAs by the end of next week, markets will have apparently priced in the worst of the financial crisis. That would be short-term bullish.

The Dow needs to close above 9200. the S&P 500 needs to close above 965, and the Nasdaq 100 has the farthest to go, at 1340. These 50EMA levels are important to me over the next two weeks.

While I remain 60% invested right now, I am still not looking for any higher levels by year-end above the 50% Fibonacci retracement levels that I outlined in the middle of November. The 50% retracement level on the Dow equates to about 10,500, the S&P 500 at 1140 and the Nasdaq 100 just under the 1600 level. I am giving the 62% retracement levels a very low probability to occur, and I would begin to scale out partially near the 50% level of any long exposure that has been held onto or built up over the course of the two months of market carnage.

Should the markets regain the 62% levels (which equate to about 11,100 on the Dow, 1210 on the S&P 500 and 1730 on the Nasdaq 100), then I will be fully out of any long exposure and begin to scale into the short exposure positions again. Although the markets may have priced in a financial crisis, I do not believe that higher markets into a consumer-led recession should maintain those levels at least for the first two quarters of next year. Ideally, markets would retrace for the first two quarters of next year, locking the indices in a range. By the end of the second quarter, I would like to begin thinking again of long exposure that can hopefully yield better profits for the next market cycle to the high side.

For now, I would just like to get out of this year relatively unscathed, and a move back to the 50% levels will let that happen.

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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.