DOW Friday close at 8744

The DOW had the strongest one week climb since the first week after the bottom was found on March 6th. The index rallied from a low of 8130 to a high of 8754 (624 points) and finished the week closing near the highs. The earnings reports this week were generally better than expected, especially in the banking industry, and that was the catalyst for the move up.

The DOW is now near the previous 10-month high made 3 weeks ago at 8878, and if there is any significant follow-through to the upside this coming week, the index could be re-starting the recent up-trend and generating a rally up to the 9000 level. The rally was definitely started with the very positive GS earnings report and if the reports continue to come out better than anticipated, the index may go higher.

On a weekly closing basis, strong resistance is found at 8799 from the previous weekly closing high as well as from the 50-week MA. Above that level, decent resistance is found at 9035 and then again at 9325. On a daily closing basis, strong resistance is found at 8799. Above that level, resistance is decent and copious between 8924 and 8944 and strong at 9035. Further resistance is found between 9388 and 9625. On a weekly closing basis, support is decent at 9629 and strong between 8001 and 8046. On a daily closing basis, support is minor 8497 from a previous daily closing low as well as from the 50-day MA. Below that level there is minor to decent support between 8269 and 8300. Strong support is now at 8147.

The sell signal given on the weekly closing chart the previous week was negated (not confirmed) with the very strong rally and higher weekly close. As such the probabilities favor further upside with the immediate objective of retesting the previous weekly closing high at 8799 (intra-day high of 8878), as well as the 50-week MA at 8799. The close Friday had no negative connotations and if there are no negative reports during the weekend, it is likely the index will be testing those levels on Monday.

It is important to note, though, that the resistance above is strong and it will likely require continued positive earnings and economic reports, to give the bulls a chance to break it. In addition, the 200-month MA is currently at 8750 and that will also tend to hold any further rallies down. On the other hand, if the index is able to get above the 8878 high seen in June, a monthly reversal signal would be given. A close above that level at the end of the month would come up as a classic reversal (lower lows, higher highs, and a close above the previous months high) and that would not only be a strong positive but could also signal that a bull-trend has started.

As you can see by all the factors outlined above, the DOW is facing a major decision over the next 2 weeks, a decision that could impact the market strongly over the rest of the year. Up until now most everyone has believed that the rally that started in March has been a short covering rally but that a retest of the lows would ultimately come, likely in August or September. A few analysts have stated they believe it is a bull-market, but the number of analysts saying that has been the minority. Now, it is evident that one group or the other will gain an advantage over the next 14 days, as a failure here would strongly increase the probabilities of a correction of consequence occurring, while a rally above the previous highs would give the bulls the upper hand.

The probabilities still favor the bears overall, but with the rally this past week, the short-term (next 2-3 days) advantage has shifted toward the bulls. As such, the action on Monday and Tuesday is likely to be important as the bulls do have positive momentum at this time. Nonetheless, the bulls do have 2 weeks in which to make an impact and that could mean that this week the indexes will trade in a narrow trading range with a slight downward bias, waiting for the following week's economic reports which are of much more importance.

This week there are no important economic reports other than earnings. As such, the bulls will have to rely on earnings and momentum to generate further upside. If the bulls are not able to build on what they accomplished last week, the bears will try pounce and make the possibility of new 10-month highs being made shrink. It is probable, though, that based on the close near the highs of the week that the DOW will go higher this week but that no new 10-month highs will be made. Certainly a rally up to the 8799 level and 50-week MA could happen, without making new highs. As such, the possible range for the week could be something uneventful like 8799 down to 8575.

NASDAQ Friday Close at 1886

The NASDAQ continues to be the strongest of the three main indexes, as it was able to generate a new 10-month intra-week high and weekly closing high, whereas neither of the other two indexes were able to do that. In addition, the NASDAQ was able to generate a monthly reversal having gone below June's low at 1754 as well as above its high at 1880. Such action, if confirmed with a close on July 31st above 1880, would be seen as a classic reversal pattern and likely signal higher prices next month.

It is evident that most of the strong buying is coming into the mid-cap market rather than into the blue chip sector. Nonetheless, this kind of action generally means that the overall market is not in a bull-trend as in bull-trends the money normally flows toward the strong and established companies (blue chip), rather than into the riskier stocks.

On a weekly closing basis, there is no previous resistance close by. Nonetheless, on the weekly chart, the gap area between 1905 and 1947 should be seen as decent resistance. If the gap is closed, the nearest resistance on the weekly chart would be psychological at 2000 and above that the 100-week MA presently at 2105. On a daily closing basis, there is also no resistance until the gap area between 1905 and 1947 is reached. Above that level, there is minor to decent resistance at 2092.

With no previous daily or weekly close resistance close-by, the gap area between 1905 and 1947 will keyed on by the traders. Gaps of this kind of magnitude (open for a total of 9 months as well as seen on both the daily and weekly charts), are of major consequence. It is evident that the gap represents an area where the market aggressively accelerated its downtrend based on the fundamentals at that time. Only if the fundamentals have changed to point where the reasons for the break have been totally negated, will the gap be closed.

Since the NASDAQ is the only index that truly can generate gaps, it is likely that the gap area will be watched closely for clues as to how much the fundamentals have truly changed, to levels before the breakdown. It will be seen as a good comparison to what the economy was prior to October and to how much of a recovery has truly happened. As such, the gap area will be just as strong a resistance level as a previous important high could be.

Closure of the gap will likely change the thinking of many of the big traders or sidelined investors that are still expecting that the March low will be re-tested. Such action would likely generate a lot of new buying on dips, buying that has not been present up until now. It would also make it a lot more difficult for the indexes to test the lows without some very negative news.

Having closed on the highs of the week and the month on Friday, and with no resistance whatsoever until the bottom of the gap at 1905 is reached, the probabilities are strong that the NASDAQ will be up on Monday and/or Tuesday at least 19 points from Friday's close. It must also be mentioned that the index has now had a reversal month (lower lows and higher highs than the previous month) and therefore the burden of proof is now in the hands of the bears. A close on July 31st above 1880 would create a "classic reversal" month, thus making the gap area much less important, as a classic reversal month would likely command much higher monthly prices in August.

By the same token, if the index closes below 1835 (last months close) on July 31st, the reversal would be seen in a negative light. Such action could be the catalyst for a strong correction downward. It is therefore likely that for the next 2 weeks, the NASDAQ will be trading between 1835 and 1905, with the economic reports due out the following week as possible fundamental catalysts for what the indexes will do for the next few months.

The NASDAQ has left an open gap between 1801 and 1824. The gap will likely be tested this coming week, so the possible trading range for the index is 1824 to 1905.

S&Poors 500 Friday close at 940

The SPX had the strongest week since the first week after the low of the downtrend was found back on March 6th. After testing successfully the 20-week MA at 864 2 weeks ago, the index generated a strong rally based on the much-better-than-anticipated banking industry earnings reports seen this past week. The index did rally strongly up to a very important weekly closing resistance area, dating all the way back to the last recession in 2002, between 930 and 946.

The close on the highs of the week suggests that further upside will be seen this coming week. Nonetheless, on a weekly closing basis, a higher close next week above 946 would likely be strongly positive, while a close next week below this weeks close at 940 would likely be negative.

On a weekly closing basis, resistance is strong at 946. Above that level there is decent resistance at 968, but the nothing until the psychological resistance is reached at 1000. On a daily closing basis, resistance is strong at 946, minor at 985, and very strong, from a double top, at 1006. 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 911, decent at 893 and strong at 879/882. Below that level, strong support will be found between 787 and 805.

The close on the highs of the week and of the month on Friday suggests that further upside will be seen this week. Nonetheless, the SPX is at a level of great importance and resistance on all the closing charts (monthly, weekly and daily) and without help, in the form of fundamental news, it doesn't seem likely the index can fulfill much higher numbers. It is important to note that most of the financial stocks in the index have already reported their earnings numbers. As such, it is not likely that this coming week the index will have any new earnings reports numbers that could generate further positive feelings.

It is evident, though, that the bulls have strong momentum at this time and if able to continue that momentum on Monday and Tuesday, to the tune of making new 10-month highs above 954, they will cause the bears to retreat strongly. Nonetheless, the SPX was the only index to close in the red on Friday, suggesting that further upside will be labored and difficult to achieve.

If the index is able to go higher and generate new 10-month highs (above 954) a reversal pattern on the monthly chart with lower lows and higher highs will be made. If that happens, a close on July 31st above 919 would generate a classic reversal pattern that would make further upside in August probable.

Monday and Tuesday of this coming week are likely to be important. There is decent resistance intra-week at 943 (last week's high) and though the probabilities of a higher high than last week are high, if the index is unable to go higher, it would be an immediate negative sign. Keep in mind that if the SPX goes above last week's high, it would be breaking above the 50-week MA as well as increasing the chances of a close above the strong resistance at 946. Such action might generate additional positive feelings and create new buying, thus causing a chain reaction to the upside to occur.

As such, if the outlook for limited upside action to be seen in the indexes this week is to happen, the SPX is likely to stay at or below last week's high. Possible trading range for the week is 943 down to 919.

The indexes were able to reverse the short-term downtrend due to better-than-expected earnings reports. The momentum to the upside grew as the week progressed and a lot of short covering was seen, possibly partially due to options expiration week. The bears were able to put a brake on the indexes as they arrived at previous levels of resistance, but were unable to generate any negative feelings at the close of the week.

With no economic reports of consequence due out this week, the indexes will largely continue to depend on earnings reports as well as on chart trading. Nonetheless, on the chart, the indexes are at levels of strong resistance that if broken to the upside, could bring in a lot of new buying and increased thoughts that a bull market has started. On the other hand, a failure this week and/or next, after such a strong rally last week, could also be a signal that a strong correction is about to start.

At this time, it is not clear which of these two possibilities is the strongest. Nonetheless, it is important to note that August and September are usually months where strong selling is seen. As such, the probabilities are slightly on the side of the bears. The next two weeks, though, are critical and likely decisive. The action for this coming week could be decided as early as Monday with the DOW likely to rally about 50 points higher than Friday's close, the NASDAQ about 19 points higher, and the SPX about 3 points higher. If that does happen and those levels of resistance hold up, the rest of the week should see a slight downside bias. Nonetheless, this coming week is not likely to be the decisive one, as next week there are several very important economic reports due out.