Market Analysis for May 7th, 2004

Selling Into Strength
By Mike Paulenoff,

This morning's employment was excellent -- +288K on non-farm payrolls, 5.6% unemployment rate, and +0.3% increase in aHE (which we consider to be a very constructive signal of rising wages!).

But what does all of this mean? That the FOMC must hike rates sooner rather than later? That the FOMC missed an opportunity to hike rates last Tues? And in either case, do equity traders fear the above-mentioned prospects? Do they sell strength within a rising-rate environment?

Our predisposition in the wake of the news has been to sell strength.

As of about 11:30 am Eastern, the E-mini June S&P remained stuck right in the middle of its intraday trading range (1117-1104), which itself is in the lower quadrant of a larger one-week trading range (1127-1104).

Our work continues to view the weeklong action as a sideways congestion zone within an otherwise dominant near-term downtrend from the April 8 rally high of 1154.50. If our work proves accurate then the next downside violation of 1103 should trigger accelerated pressure that drives the E-mini June S&P to our next target zone of 1090-80. Only a rally that takes out the top of the trading range at 1127.50 will neutralize our current near-term negative outlook.

In the E-mini June Nasdaq, we see a sideways triangular type of congestion zone that has been carved out for the past week. This morning's rally tested the top of the range, but thus far has failed to break out to the upside.

Our work warns us that later this afternoon the E-mini June Nasdaq could very well break above the coil resistance line at 1434.50 into the 1443.47 target zone prior to the completion of this consolidation pattern -- a resumption of the intense selling pressure that drives the E-mini June Nasdaq to test critical intermediate support 1365.

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