Market Analysis for Feb 5th, 2004

Quiet (with Some Short Covering) Ahead of Friday's Unemployment Data
By Mike Paulenoff,

For most of the session up until about 1 pm Eastern the indices were trading in a very narrow range towards the low end of the range for the past week or so. That would make it down near 1125 in the E-mini S&P and in the 1465 area in the E-mini Nasdaq. But the lows we probed from yesterday have held, and all of a sudden around 1 pm Eastern the indices spiked to the upside and blew out the stops, admittedly amidst very thin conditions ahead of the unemployment data coming out tomorrow.

Tomorrow you have unemployment, and that is arguably the most important release every month, and there's even more emphasis placed on tomorrow's figures because the figures from last month were so disappointing. Keep in mind that additions to payrolls are expected to climb by 170,000, and that will be announced in the morning. If that does occur, then it will probably be the highest number of people added to the workforce in two years. On the other hand, last month the economists were expecting an addition of 150,000, and the actual number came in at 1,000.

So if tomorrow is a repeat of a very poor performance in the labor market compared to what the expectations are, you could see a very negative reaction from the equity markets. That's because by now most people and most investors would have wanted and certainly hoped for some sign that the labor is kicking in to take the label off this particular recovery as a jobless recovery.

So for the time being, tomorrow's numbers are really a problem until they're proven not to be a problem. Nonetheless, after a week's worth of selling pressure, today you've got a little bounce ahead of the numbers and people short covering ahead of the data tomorrow. They don't want to get caught short. Maybe there'll be 200,000 additions to payrolls tomorrow, which certainly would be a shock and get everybody rolling on the upside, and probably create quite the upmove.

But for the time being, the indices are at the high side of their ranges today, but they have not yet broken critical overhead resistance. That would be 1132.50-1133 in the E-mini March, which has to be broken to make the pattern look considerably more constructive. In the E-mini March Nasdaq, the initial level of 1478 has to be broken, and that should trigger a move towards 1485. That 1485 level is the resistance zone that has to be taken out to argue that the decline we've seen in late January is over.

As for the QQQ, they had a low yesterday of 36.32 which is right near our target of 36.30-.20, and today they rallied to 36.65 or so and then got hit hard and came back to test yesterday's lows, which held. So now you have a minor double-bottom in the Qs at 36.32, and the rally this afternoon amidst very thin conditions took the Qs to nearly 36.70, a marginal new high.

A big problem up there is the trendline from late January, which cuts across the price axis right there at 36.70. So that is one formidable resistance level that has a lid put on the Qs for the time being.

In order for the Qs to generate a decent near-term buy signal, you have to not only take out 36.70, that trendline, but continue above that and take out yesterday's rally high at 36.84. If that's accomplished we'll have a short-term low or bottom in the Qs and we'll be looking for a move to 37.50.

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