DOW Friday close at 8497

After the previous week's failure to break above the recent intra-day high at 9794, the DOW tried to re-new the downtrend this past week. Starting on Monday, the index showed weakness every day generating a lower close than the previous day's close. Negative news continued to add fuel to the fire and on Thursday the index attempted to make new lows by breaking below the 8000 level and re-testing the previous low at 7883 made 6 week's ago with a drop down to 7965. The re-test seems to have been a successful one as the index rallied 912 points from the lows on that day and generated a classic reversal day with higher highs, lower lows, and a close above the previous day's high. Classic reversal days are rare indeed and generally imply a temporary end to the trend in place.

The earnings report period is almost over and the negativity of future reports regarding the slumping economy seems to be factored in already. Unemployment is anticipated to continue to grow at an alarming rate and everyone is talking about this recession likely to be one of the strongest and longest in history. It is difficult to visualize things getting much more negative that they are already. With all the fundamental news coming out being negative, the reversal on Thursday has to be considered especially indicative, as it was not caused by any external factors such as the Fed applying a temporary "fix" to the problem. It is evident that the reversal came at a time and place where the selling simply dried up and strong short-covering began to occur.

On a weekly closing basis, strong support continues to be at 8451 and then strong again at 8379. In addition, the 8236 level is also strong support from 2001. On a daily closing basis, support is strong at 8451, decent at 8283, and strong major at 8176. On an intra-day basis, support is decent at 8286 and strong at 8176. On a weekly closing basis, resistance is decent at 8852 and then strong at 9325. Above that there is nothing until the psychological level of 10,000 is reached. On a daily closing basis, resistance is decent at 8836 and again at 8944, both from previous daily closes as well as from the 20-day MA. Above that there is decent resistance at 9265 and 9388, and major at 9625 from a previous daily high close as well as from the 50-day MA. Intra-day resistance is decent at 8923, minor at 9160 and 9265, and strong up at 9654 and 9794.

In going back to 2001, there are similarities in the chart that might signal the kind of action that can be expected during the next few months. In 2001, the DOW dropped to 8063 (low made on Sep. 17th) from a high of 11379. Subsequently the index got into a 4-month rally that took it up to a high of 10664. This recent drop has been from a high of 11867 down to 7883 (low made Sep. 29th). If the lows have been made, it is likely that upside action will occur from here on in. Based on the late sell-off on Friday, it is likely that sometime this coming week drops back down to 8176-8235 will be seen. Such a drop will fulfill the chart (last re-test of the lows) and set up the kind of a support level necessary to stimulate some confidence and new buying. It is likely that the volatility will be reduced from here on in and that rallies will be more subdued but more consistent.

The reversal seen on Thursday was a major event within a very negative market. Nonetheless, it does seem to represent a lack of ability in the bear camp to take the indexes lower at this point. Though there are very few fundamental reasons for the market to rally, trading the wide range already established over the past 6 weeks is likely to continue to occur.

Probable trading range for the week is 8176 to 9285.

NASDAQ Friday Close at 1517

The NASDAQ generated a "key" reversal on Thursday by making new 6-year lows and then closing above the previous day's high. "Key" reversals are very rare as they can only be seen at new daily or weekly highs or lows. Such reversals generally signal a short-term change of trend. The NASDAQ continues to be the weak sister among the 3 indexes as it not only made new 5-year intra-day lows but closed below the lowest weekly close as well. It is evident that emerging markets continue to take the brunt of the selling, as many of the stocks that comprise the index are the least likely to survive the economic conditions presently seen. Nonetheless, it must be stated that the NASDAQ has generally been a lagging indicator to what the market is going to do, and therefore not the index to follow.

It is important to note that on the daily chart, the NASDAQ was able to generate a double bottom at the 1500 level and though the weekly close was the lowest in 6 years, the daily close shows that support held. In addition, the index did drop down close to a "major" level of support between 1387 and 1423 with a drop down to 1429. It is therefore safe to say that the chart formation may have been completed with this past week's drop.

On the weekly closing chart, support is major at 1423 from a long term close at the price back in Sep01. Some support is also seen at 1479 from an important weekly closing high in 2002. On a daily closing basis, support is very strong between 1499 and 1506. On an intra-day basis, support is decent between 1494 and 1499 and strong again at 1429. On a weekly closing basis, resistance is minor at 1552 (previous weekly low close) and very strong up at 1711/1721. Above that there is no resistance until the gap area at 1905. On a daily closing basis, decent resistance is found at 1600, and again at 1647/1650 from a previous high and previous low daily close. Strong resistance is found at 1780 and major at 1844. On an intra-day basis, minor resistance is found at 1600 and again at 1681, and very strong up at 1780. Above that there is nothing until the 1897 level is reached.

Though the NASDAQ is the weak sister, the reality is that the resistance levels above are the least strong of the indexes, and therefore rallies in this index may outperform the others. The drop down to 1429 might also be indicative of a downside objective having been reached. The weekly closing low at 1423 and the intra-day low at 1387, back in 2001, signaled a low that stood up for months thereafter. A rally up to the 2099 level was then seen during the ensuing 4 months culminating at that price in Jan07 2002.

The previous intra-day low prior to the drop down to 1429 was 1494 and there were 3 days thereafter where the intra-day low was between 1499 and 1504. It is therefore likely that level between 1494 and 1504 will be support this coming week. Nonetheless, if the NASDAQ breaks below that level, drops down to the 1423 to 1387 could occur.

S&Poors 500 Friday close at 873

Like the NASDAQ, the SPX generated a "key" reversal on Thursday with new daily and weekly lows and a close above the previous day's close. Such a reversal is indicative that the index has found a temporary bottom. Nonetheless, on the negative side, the SPX did make a new 5-year weekly closing low by closing 3 points below the previous low close at 876. Such a break, though, cannot be considered a true break as anything within 5 points of a previous close is not considered indicative.

It is important to note that back in 2002, the 875 level was considered a minor but clearly evident support level. With a close way back then at 875 and 2 closes on this occasion at 876 and 873, if the index is able to close higher next week, it will be considered not only a successful re-test of that support level but a double bottom as well.

The "key" reversal, though, has come at a time and price that is highly likely to be real. The entire area around 800 has proven to be a major level of support over the years as even back in 1997, the index had an important low at 855. With such history, added to the action of the past 8 weeks, it seems highly likely that without new fundamentals to push the index lower, that this is a level that will generate new buying once confidence in the support level has been established.

On a weekly closing basis, support is strong at 875 and again at 847, 828 and major at 800. On a daily closing basis, support is major at 848/852 from a double bottom at that price. On an intra-day basis, support is strong between 839 and 846, and then major at 817. On a weekly closing basis, resistance is very strong at 940 and again at 968. Above that level there is minor resistance at 1000 and much stronger at 1164. On a daily closing basis, resistance is decent at 911, then a bit stronger at 930/940, and major up at 1003/1006. On an intra-day basis, resistance is minor at 917, again at 952, and major up at 1008. Above that there is nothing until 1044.

The SPX is an important index as it represents the type of companies (financial) that started the collapse in the market. It is therefore important that this index lead the way up. With the "key" reversal seen on Thursday, coming on the heels of important price levels having been reached, it is highly likely that no further downside of consequence will be seen.

Drops down to the 839/846 level are expected sometime this week, but once seen and held, the likelihood of a "sustained" rally upward over the next few months is high.

Probable trading range for the week is 839 to 973.

The earnings report season is nearly over and even lower numbers than the bad ones seen this quarter are already being anticipated for the next quarter. Unemployment is expected to rise strongly over the next few months and many companies have already stated they are likely to continue cutting jobs. Many companies are on the brink of bankruptcy and there are few (if any) hopes for a recovery any time soon. The situation is bleak and most investors, analysts, and economists are expecting it to get worse before it gets better. Why then, have the indexes been able to hold themselves above the lows seen 8 weeks ago?

It is likely that the lows made on Thursday in the indexes will hold up and that a more consistent rally upward will begin to occur after one last re-test of the lows is seen. It is probable that the dramatic drop in prices over this period of time has already anticipated most of the negative news that is forthcoming. With the sell-off and close on the lows on Friday, it is probable that the re-test of the lows will occur at the beginning of the week. Nonetheless, some positive news from the G-20 meeting this past weekend could come out and give the market some initial support. Nonetheless, a drop to the lows mentioned above, at some point in time during the week, is likely even if that happens.

Over the past few weeks, even with all the negative news that has come out, the indexes have traded in a wide trading range with rallies of some consequence occurring. There doesn't seem to be any reason for that not to continue to occur over the next few months as new earnings reports will not be seen until January. In addition, if a short-term (2-3 months) bottom has been established, it is likely that some new buying will occur in stocks that have overdone their downside targets. Such buying, in conjunction with the belief among the bears that new lows are unlikely at this time, could give the market an added boost as well as a bit more consistency to the rallies.