Technical Setup Looks Positive

Last week's price action moved the indices to the levels that I needed to be broken on a closing basis in order to have more confidence in a possible uptrend leading up to the inauguration. While I would have liked to see these levels broken last week, I was giving it until this Friday to be accomplished to still be a higher probability for an uptrend move. I was pleased with last week's behavior given that more bad news was thrown at it and it appeared that for the most part, all negativity was continuing to be purchased.

The biggest missing component still continues to be a lack of buyers at resistance. The majority of buyers appear to get active on retracements and pullbacks. As I said last week, I need more risk-seeking behavior to be displayed, which would portend investors and traders buying resistance levels for a break higher. I am not looking for "buy low, sell high." I am looking for "buy high, sell higher."

I actually like the technical picture here. After several months of all technical behaviors being completely obliterated, this feels like the first real shot at a technical formation that might yield an expected result. I'm talking about the downtrend channel formation and the 50-day exponential moving average (50EMA) that is riding the slope right above the channel resistance lines in all three indices.

The positive thing about the current scenario is that if the indices can finally break above the downtrend channel resistance, the possibility to close just above the 50EMA increases and offers the bulls a good shot for the first time in about four months of market carnage.

The negative to the current scenario occurs if the indices fail to break above the downtrend channel resistance on a closing basis. If we fail this week, we'll have the real possibility for the indices to move to the bottom of the downtrend channel. The bottom of the three downtrend channels actually comes very close to the most recent lows from November. This would seriously deflate the confidence of any new bulls to the market and create a need for a successful retest of the November lows if the first quarter of next year is to have anything that the bulls can hang their hats on in the near term.

My upside targets have not changed from last week, and my percentage investment remains the same moving into this week. I am still 60% invested, looking to increase that to 75% if the most recent resistance levels break on a closing basis. I need the Nasdaq 100 (NDX) to move over 1285, the S&P 500 to break 910 and for the Dow to move above 9,200. If these can happen by Friday of this week, I will be looking for a more solid uptrend leading to the inauguration.

Upside targets remain at the 50% Fibonacci retracement levels with an outside chance to see the 62% area in the first quarter of next year. Again, I would be looking to add short exposure again if the indices actually reach back to the 62% levels.

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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 SSO, DIA and QLD, 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.