Upside Momentum Faltering

Outlooks from Intel and IBM, and the jobs report, will set the direction for Friday's trading

By Paul Cherney

Short-term indicators based on end-of-day data for both the Nasdaq and the S&P 500 have lost upside momentum and must be considered neutral with only a slightly positive bias.

If there are positive comments from IBM (IBM ) and Intel (INTC ) -- both of which were scheduled to give guidance or comments on Thursday -- those comments might be enough to generate a day or a day and a half of upside. Friday's employment report is a wildcard because many people think improvements in the employment picture have already been discounted by price action. I have Street estimates for the non-farm payroll number near 150,000. The unemployment rate is expected to hold steady at 6.0%.

Concerns that the Fed might eliminate the term "considerable period" of time (in reference to their monetary policy stance of low rates) will probably cap upside in the short-run. The Fed meets Tuesday, Dec. 9. If the Fed is getting concerned about the potential for an increase in inflation and an overheating economy, they might pressure themselves into thinking about some sort of a move on or before the June-July meeting.

There are extenuating circumstances in place. The year 2004 is an election year. During the last presidential election year I looked back at Fed action (during election years) since 1928. The closer to the time of the election, the less likely the Fed is to make a move. If I remember correctly, the Fed has never moved rates in the month of October in an election year, and I think only once or twice in September of an election year.

The point is, that if the Fed is concerned about an overheating economy, they might feel compelled to do something to tighten credit, but if they don't tighten as of the July meeting (2004), then I think they will wait until November (after the election).

I should also point out that after the markets have an initial reaction to any change in monetary policy, ultimately, there can be a bullish spin easily created on the trading floors. The floor logic runs something like this: Stock prices will go higher because the Fed would not increase rates unless the economy was strong.

Both the Nasdaq and the S&P 500 are at or near price levels where a stall in the advance is likely. I think it would take a huge headline to generate a sustained run higher. Prices might only move a little bit higher and then just meander sideways with one or two day dips greeted by the markets as a buying opportunity. I think there should be limited upside (perhaps) until the last six or seven trade days of the year (meaning after Monday, Dec. 22). I will have to admit I was wrong if the Nasdaq can post two closes above 2,011; the same level for the S&P 500 would be 1,106, but I would tend to look for that recipe for humble pie with two closes above 1090.

Nasdaq resistances are 1,878-1,987, 1,996-2,011.25, and 2,042-2,073.

S&P 500 resistances are 1,068-1,106, with thick, brick-wall style resistance at 1,068-1,090.

Immediate support for the Nasdaq is 1,973-1,930 with a focus of support at 1,973-1,947.

Immediate intraday support for the S&P 500 is 1,068-1,065, then 1,060-1,052.

Cherney is chief market analyst for Standard & Poor's

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