NDX Will Target the Gaps

The power of window dressing combined with a few key reports out of Wall Street like Buffett and Bear Stearns (BSC - commentary - Cramer's Take) and the October Fed decision prognostications have overcome my expectations of technical profit-taking this week.

The NDX has turned into a gapfest over the past two weeks, and when distribution pressure finally sets in, these gaps are the most likely targets to push the index. The other interesting part of these past couple of weeks is that while the NDX breaks to new highs pushing 2100, the Nasdaq Composite didn't enjoy the same behavior. It has yet to break to new multiyear highs.

So let's run down the gap levels. The first one exists around NDX 2070, which was the May 2001 resistance of 2074. After window-dressing accumulation pressure subsides, the bears should easily fill this gap. The next one is around 2030, with NDX 2000 being the last measure of support that, if tested, would still keep the bulls in control of the short-term time frame.

My expectations for weakness on the heels of weaker housing data didn't come to fruition -- it appears that this either is already baked into the cake, or window dressing really just floated all boats. Even small-caps began to take shape; Alan Farley was one of the first to point this out in a post earlier this week.

This morning, futures are slightly lower on the heels of overseas weakness in Europe and Japan, but with the PCE figures due out, this could easily change. I have never been one to chase markets, and the short exposure expectations have been run over this week. I'll be taking the Friday session off rather than trying to throw good money after bad. The levels I'll be looking for are still those gaps below 2100 at 2073 and 2032.

If I had to trade today, I would be looking for the break of the half-hour lows to confirm a short setup. In this case, the ideal scenario is that the NDX remains under 2105, then breaks half-hour support and leads to the 2073 gap fill level. From there, I wouldn't expect anything else in weakness and would quit for the day.

Should the index stay strong over 2105 in the first half hour of the day, I would be on the sidelines, content to watch everyone else make money on the long side, as the train would have already left the station.

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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.