DOW Friday close at 9171

The DOW continued its upward climb, closing higher again this week than the previous week. In addition, the index now has 13 out of the last 16 days of higher daily closings, with the biggest down closing day being only 35 points. The index shows no intra-day resistance of consequence above for at least another 410 points. As such, the possibilities remain high of the index rallying further.

The earnings reports that came out this past week continued to be generally positive and the economic reports released, though mixed, were not negative enough to put a stop to the bullish feelings that continue to surround the market. On Friday, the DOW had yet another positive weekly close and there is no weekly closing resistance above until 9325 is reached.

On a weekly closing basis, decent resistance is found at 9325. Above that level there is no resistance whatsoever until the 100-week MA is reached up at 10710. The 10,000 level must be considered strong psychological resistance. On a daily closing basis, there is minor resistance at 9265, a bit stronger at 9388, and very strong at 9625 (highest daily close since October 6th. On a weekly closing basis, minor support will be found at the 50-week MA currently at 8780. Below that level, very minor support around 8500, decent support at 8296, and strong support at 8147. On a daily closing basis, there is minor support at 9071 and psychological support at 7970/8030, but below that there is no support until the 50-day MA is reached down around 8600. In addition, there is decent support between 8419 and 8565 from several previous daily-closing lows in that area. Below that level there is strong support at the 200-day MA presently at 8280.

In looking at this year's chart there is little in the form of resistance at this time to stop further rallies. Nonetheless, it is important to note that Friday was an inside day (lower highs and higher lows) and with the breakout above the 5-day intra-day resistance level at 9125, follow through to the upside should have continued. The GDP number was generally better than expected, though there were some negatives within it, nonetheless, the indexes have been shrugging of any slightly negative information and that did not happen on Friday.

It must also be mentioned that in the last 30 minutes of trading on Friday the VIX shot up and broke the week's high as well as closed above the most recent high daily close. It wasn't that indicative, but it has been said that when the SPX and the VIX go up at the same time it generally is a negative sign.

I also want to re-visit a chart pattern from 2001 that I have mentioned in the past. In 2001, after the DOW dropped from 11350 to 8062, the index had a short-covering rally of consequence from that low up to 10300 (a rally of 2238 points). That rally was subsequently followed with a correction down to 9529 (a drop of 771 points). That correction then generated another rally back above the previous high at 10300 and up to 10673 (an 1144 point rally), where the top was found that lasted 3 years before it was taken out. It must be mentioned that at 10673 there was no previous resistance, much like what is being seen now. The subsequent drop, after that top was formed, took 4 months and ended up making a new low at 7533.

The 2001 action is being mentioned because the similarities are strong to what is happening now. The DOW, after reaching a major low this year at 6470, generated a rally up to 8878 (a rally of 2408 points). The index then had a correction back down to 8087 (a drop of 791 points). From that correction the DOW has now generated a rally up to last week's high at 9246 (a rally of 1159 points), where no previous resistance of consequence is found. When you compare the 2 years, what you get is the following:

1) (2001) a rally of 2238 points, a drop of 771 points, and a subsequent rally of 1144 points.
2) (2009) a rally of 2408 points, a drop of 791 points, and a subsequent rally of 1159 points (so far).

As you can see the similarities are certainly there. As such, it is possible that the high last week could be the top of this short-covering rally.

It must also be mentioned that in 8 of the last 12 years, the DOW has dropped a minimum of 1326 points between August and October. It was only on those years that the index was in a bull-market that it did not happen. It is evident, then, that whatever action is seen this coming week (beginning of August) will clearly demonstrate whether the indexes are back to being a bull market, or simply had a strong short-covering run to the upside.

At the time of this writing, it is impossible to give any probability numbers as to what the index will do this coming week. Nonetheless, with the failure to make new intra-day highs of Friday, the VIX spiking up Friday afternoon, and the similarity with 2001, gives credence to the fact that perhaps we have seen the high of this 5-month impressive rally.

NASDAQ Friday Close at 1979

The NASDAQ was able to continue its upward rally this past week and in the process reached the strong psychological resistance level at 2000. The index was unable to generate a close above that level, though, and was the only index that closed in the red on Friday.

The NASDAQ, though, does show very strong previous resistance up at 2000, especially from the 100-month MA, which has in the past been a line that the index has had trouble breaking above.

On a weekly closing basis, there is no recent resistance seen until the 100-week MA at 2099 is reached. Nonetheless, going back to 2001/2002, resistance is found between 2022 and 2057 as those two were intra-week highs seen that year. On a daily closing basis, only minor resistance is seen at 2092. On a weekly closing basis, support is minor from a previous high weekly close at 1859 and strong at 1756. On a daily closing basis, support is minor at 1966/1968 (two most recent low daily closes) and then nothing until 1862 is reached (previous high daily close of some consequence). Strong support is found between 1746 and 1765.

There are many important levels seen in the chart of the NASDAQ that perhaps make this index the "key" index to watch this coming week. To begin with, in looking at the monthly chart, the 100-month MA (currently at 2000) held the index back during the first 3 years of the bull market that started in 2003. It was not until 2006 that the NASDAQ was able to break decisively above that line. As such, even with the fact that the index could be in a bull market, it is unlikely that it can go much higher. It must also be noted that the 100-month MA has never been broken while in a down mode (trending down instead of up) and therefore is less likely to get broken at this time as it is still in a down mode.

It is also important to note that since 1998, there have been 2 major intra-month highs and 2 major intra-month lows between 2026 and 2099 making that level very strong resistance on the monthly chart. In addition, it must also be noted that the 100-week MA is currently at 2099, adding strength to the resistance. It must also be mentioned that during the last recession in 2001-2003, the index saw two major short-covering rallies from 1620 to 2328 (2001) and from 1387 to 2099 (2002). These rallies were 708 points and 712 points, respectively. The rally this year has now reached 744 points (1266 to last week's high at 2010). As such, if the index is in a short-covering rally (not a bull market), it is likely that the top has been found.

There is one additional factor to mention that I usually do not put much importance to, as it is not something that is consistently accurate. Nonetheless, when added to all the factors mentioned above, must be considered to add importance to the area. The down trend line that started on Oct07 with the high at 2862, that is then drawn using the May08 high at 2551 and the Aug08 high at 2473, is now at 2010 (last week's high). Trend lines are by nature inconsistent indicators, as generally speaking they are not followed closely by professional traders. Nonetheless, when added to other chart factors can fortify a level strongly.

One thing that can be stated with some confidence is that the 2000 level (up to 2099) is an area that is likely to pose high resistance problems to the index. When added to everything else mentioned above, it is highly likely that the NASDAQ does not have much more upside potential, if any.

S&Poors 500 Friday close at 987

The SPX was able to get close to the major psychological level at 1000 this past week with a rally up to 996. Nonetheless, the index was unable to see a print at 1000 and ended up the week closing at 987. Nonetheless, the break above the 50-week MA that occurred 2 weeks ago was confirmed with a second close above the line. As such, the probabilities of further upside are strong.

It must also be mentioned that the SPX, like with the other 2 indexes, had a "classic" reversal month (higher highs, lower lows, and a close above last month's high). Such a reversal suggests that further upside will be seen in August.

On a weekly closing basis, resistance is only psychological at 1000, no other resistance is found until the 100-week MA currently up at 1163 is reached. Nonetheless, on the monthly chart, resistance is strong at 1014 from the 200-month MA. On a daily closing basis, resistance is decent at 985 and strong at 1006, from a double top at that price. On a weekly closing basis, support is non-existent until strong support is found at 879/882. Below that level there is minor support at 825 and very strong support at 800. On a daily closing basis, there is minor support at 975 (this past week's lowest daily close) and at 946 from a previous daily high close. There is also minor support at the 50-day MA at 919, and strong support at the most recent low close, as well as 200-day MA at 879.

Like all the indexes, the SPX has been in a strong move up making new 10-month daily and weekly closing highs since the last correction that was seen in July. Nonetheless, there is a strong daily close double top at 1006 that looks ominous. In addition, the index shows a previous daily close at 985 that is sandwiched between the double top at 1006. Friday's close at 987 is slightly above that level, but not sufficiently so to say it has been broken. The SPX does have the 200-month MA currently at 1014 that should be strong resistance if the index fulfills the probabilities of a higher high in August that was made from the "classic" reversal month seen in July.

There is one very important thing to note regarding the SPX that needs to be mentioned. Even if the index is now in a bull market, not something that has yet been determined, the 1000 level will likely pose strong resistance problems to the index. Back in 2003, when the index had successfully tested the previous 5-year weekly closing low and was in an established bull trend, the 1000 level proved to be a difficult area to break for a period of 12 weeks (3 months). That year the index first reached the 1000 level on June 2nd, but it was not until August 25th that the index was able to generate a weekly close above 1000. The SPX did get up to a high of 1119 by the end of December, and then continued its bull trend. Nonetheless, during the period from June 2 to August 25, the index languished (traded sideways in a narrow trading range) with weekly closes between 976 and 988 (intra-week trading ranges between 960-1015). As such, it means that even if the index is now in a bull trend, it is possible the index will trade at this level for the next 3 months.

The pattern described above will likely be a good indicator in determining whether the index is in a bull trend or not. During that period of time (June-August) in 2003, the lowest weekly close seen was 976 (960 on an intra-week basis). It is therefore probable that if the index is able to generate a lower weekly close than 976 next week (or an intra-week low below 960), it could be a strong indicator that the index is not in a bull trend and that a strong correction is to occur. By the same token, any weekly close above 1006/1014 (above 1015 intra-week) would likely mean further upside the rest of the year.

At this time, it is impossible to determine what the index will be doing this coming week, but there are reasons to believe that it will either trade sideways or lower.

It is evident that there are many conflicting chart forces surrounding the indexes at this time. Though the indexes have been on a strong rally the SPX and the NASDAQ have reached levels that will be difficult to break above, even if in a bull trend. The market is now strongly overbought and most of the earnings reports of great importance are out. In addition, one of the strongest indicators of the status of the economy (GDP) has now been released and not going to be a factor until the end of next month. As such, it is unlikely that any catalyst of consequence will be seen during the next few weeks.

The action on Friday seems to suggest that further upside of consequence is now unlikely, though new highs by a "small margin" could be seen. As such, the probabilities seem to favor either a sideways market for the next 4 weeks, if the trend is a bull, or a strong move down indicating that the short-covering rally is over. The SPX seems to be the index to watch this coming week, especially on a weekly closing basis, as it is the one index that has clearly defined levels of support and resistance which would signify a bull trend, or the top of the short-covering rally.

At this time, there are no signals that would allow me to determine which of these options is the most likely. Nonetheless, it can be said, with a fair degree of certainty, that further upside of consequence is not likely to be seen for the next few weeks. It must be mentioned, though, that the market is now into the August to October period, and on that alone the odds are 3-1 in favor of a down move, as 8 out of the last 12 years were to the downside during this period of time.