DOW Friday close at 8001

The DOW, after breaking above the previous weeks range and showing some rally power early in the week, failed to maintain its upward momentum and closed out the week near the lows. In addition, the index closed in a new 5-year weekly closing low giving notice that further downside action, may follow. On the positive side, the index was unable to break below the previous week's intra-week low at 7909 or below an important intra-week low set in October 10th at 7882, thus leaving some questions unanswered.

Nonetheless, the continuing stream of negative news does not seem to be at an end and now that the DOW has broken its strong weekly support, it seems likely that selling pressure will continue for at least the couple of weeks.

On a weekly closing basis, you have to go back to 2003 and decent support at 7740 and to 2002 for the lowest weekly close and major support at 7528. The support between 7442 and 7640 does go back to 1997 and must be considered major. On a daily closing basis, support is recent and minor at 7049 and then very strong at 7552. On a weekly closing basis, there is minor resistance at 8046 and then a bit stronger up at 8516. Major resistance is up at 9035. On a daily closing basis, this past week's daily closing high at 8375 is strong.

The consistent selling pressure seen since January 6th and the failure to generate any follow through to the mini breakout the index had on Wednesday, has left the chart in a very weakened condition that will not likely generate enough buying at this time to turn the short-term trend around.

To be able to understand what is likely to happen, tt is important to study the chart of the DOW during the last recession back in 2002-2003 as the action has been very similar. It is possible that the index is now in a three-step bottoming out phase in which the first step is over, the second step is now happening, and the third step will happen over the next few months.

In 2002, the first step was the drop in the DOW to 7553 and a weekly closing low of 8019, it was then followed by a rally and a weekly high close of 8873. The second step was a drop to new intra-day lows at 7147 and a new weekly closing low at 7528. It is important to note that from the time the index closed below the previous close of 8019 with a close at 7986, the index only took 3 weeks to make the new intra-day low at 7147. The third step took the index back up to a weekly closing high of 8896 and that was followed with a drop to re-test the lows with an intra-day low of 7417 and a weekly closing low of 7740. That last step took a total of 5 months from low to low. From that moment on a new bull market began.

On this occasion, the DOW's first step was a drop down to 7449 intra-day and a weekly closing low of 8046. A rally and a weekly closing high of 9035 followed that closing low. The second step is now likely in process with the close on Friday below the previous weekly close support at 8046. This step will likely take the index below the previous intra-day low of 7449 (perhaps also as low as 7147 as in 2002) and to a likely weekly close around the 7500 area. Hopefully, if this scenario plays out, the third step will kick in with a subsequent rally back up to the 9000 level, followed by a drop back down to the original intra-day low of 7449, a close somewhere around 7700 and the beginning of a new bull market thereafter. If this scenario comes to be, you are looking at about a 5-6 month process (something the analysts are saying is likely) before the market can truly say it has bottomed.

The three-step phase I have outlined above is a normal chart pattern often seen after a severe downtrend. In those cases, it is usual to see a strong short-covering rally made after the first major low is set. Nonetheless, without a major fundamental change occurring, it is also usual to see that first low get broken and a new low of consequence made soon thereafter. Depending on the severity of the second break and of the short covering rally thereafter, it is probable that the second low is "the" major bottom.

Though the break of support on Friday did not come with high volume or with panic selling, it is probable that further downside will be seen this coming week. It is important to note that there is still a possibility that the 7882 level of intra-day support will hold up and that Friday's new 5-year weekly close will be reversed next week, making this whole evaluation moot. Nonetheless, the probabilities are in favor of more downside, as the break of weekly support was ominous and the fundamental news is not likely to get much better at this time.

I don't expect much volatility this week and the drop is not likely to create any new panic selling. I do expect, though, that the index will be under selling pressure all week. Possible trading range for this coming week is 8012-7667.

NASDAQ Friday Close at 1476

The NASDAQ was able to show a bit more strength this week than the other indexes as it seems money has been flowing more toward the smaller cap companies than the blue-chips. Nonetheless, the break of the strong psychological support area of 1500 seen on last week's close was confirmed this week with a second close below that area, making it probable that further downside will be seen.

It is important to note that the NASDAQ did gap up on Wednesday above the 20 and 50 day MA's. The gap was considered at the time to be a runaway gap and if confirmed should have helped generate a strong rally. Nonetheless, the rally failed and the gap was filled on Thursday. In addition the index closed below the 20 and 50 day MA's once more and gave a failure-to-follow-through signal. Such a failure will now put the index under strong selling pressure and at risk of the original gap down at 1384-1397 getting filled. It is evident that area will now become a magnet.

On a weekly closing basis, there is no previous determined support until the 5-year low at 1384 is reached. That support is considered to be major. Should that level break, there is decent support at 1282 and again at 1248. On a daily closing basis, support is decent at 1441, strong at 1398 and major at 1316. On an intra-day basis, support is decent between 1434 and 1441 and very strong at 1398/1400 from several previous intra-day lows as well as from a gap between 1387 and 1398. On a weekly closing basis, resistance is now minor at 1541, strong at 1564 and major at 1632. On a daily closing basis, resistance is strong at 1507 and very strong at 1541. Above that level decent resistance will be found at 1576 and very strong at 1651.

The failure of the NASDAQ to maintain the runaway gap open, especially after the index had been able to reverse the break of support of the 1500 level on the daily chart, will likely be a strong negative this week. It must be noted, though, that the index still has many support levels below that will likely soften the selling pressure and prevent the index from breaking down in a decisive way. This is also an index that is still substantially above its most recent weekly low close (unlike the DOW) and will likely continue to receive more buying than any of the other indexes.

Nonetheless, the NASDAQ still closed lower than last weeks close and that means that no successful re-test of the lows on the weekly closing chart has yet occurred. As such, it can be expected that the index will be testing the lower levels of support this week and if broken, drops down to close the breakaway gap between 1384 and 1397 will likely be seen. The key for this week is the 1434 level, which has been the most recent intra-week low and is considered to be a level that is broken will cause the stock to test the 1398 level at least.

The NASDAQ will likely remain as the strong sister this coming week and be the index to watch for clues as to the severity of the break of support.

Possible trading range for the week is 1491 to 1398.

S&Poors 500 Friday close at 826

The SPX closed lower this past week than the previous week and was unable to confirm last week's close at 831 as a successful re-test of the lows. As such, the index has now put into question the strength of the double bottom at 800, built over the past 5-years using weekly closes. Of the 3 main indexes, the SPX was the strongest this week due to rallies in the financial industry. Nonetheless, the close below 829 on Friday, a level that was seen in 2003 as a successful re-test of the 800 level, is a small sign that perhaps not all is as rosy as the financial rally seemed to suggest. With the failure to close above 829, the index has now put itself into a precarious situation where a close below 800 next week is possible. Such a close could open up the floodgates to selling by chart and technical traders, as the 800 level is the last known "major" support on the chart going back 20 years.

It must be noted that it is the SPX and its financial components that have been leading the decline this time around, versus what happened in 2002/2003. With the announcement on Friday that the "good bank/bad bank" approach the Fed was looking to institute has hit a snag, it likely means that several major banks are still facing bankruptcy or severe downgrade of services. Under this scenario, selling pressure will likely resume in the financial industry this week and the index would then, once again, lead the way down.

On a weekly closing basis, support is major at 800 and minor down at 737. On a daily closing basis, support is minor at 816, strong at 805 and major at 752. On a weekly closing basis, resistance is decent at 872 and very strong between 932 and 940 (from two weekly closing highs in 2002, as well as a recent weekly closing high at 940 and the most recent weekly closing high at 932). On a daily closing basis, resistance is now very strong at 874 and minor at 840/850.

It must be noted that the SPX was quite well supported this past week as many financial stocks generated strong midweek rallies. In addition, tt must also be noted that several strong intra-day and daily closing supports built recently in the index held up this week. Therefore, in looking at the daily chart of the SPX, it must be stated that the index still looks quite positive and nowhere as weak as the other two indexes. Nonetheless, several financial stocks, such as WFC, JPM, and GS, had the opportunity to make a statement on Friday by showing signs on the monthly chart that they had in fact found a bottom. In all cases they failed.

Even though the SPX did not give any clear signs that it is going lower, the failure of several financials stocks to maintain or confirm their rallies at the end of the week seems to suggest that selling pressure will be renewed. If there is no immediate resolution to the "good bank/bad bank" idea, it is likely that the financial stocks will fall back again and cause the index to break its supports.

Without a shadow of a doubt, though, it will be the SPX that will give us the clue as to whether the expected drop in the indexes will happen or not. An intra-day break below 800 will be a "clear" indication that the indexes are heading lower. An intra-day rally above 852 could be a sign that the problems may be resolved. Possible trading range for the week is 831 to 775.

The indexes attempted to stage a rally midweek when financial stocks staged a rally based on the "good bank/bad bank" approach that was suggested by the Fed. Nonetheless, that approach seemed to have hit a snag at the end of the week at the same time that negative reports on the economy kept on flowing and those factors caused the rally to fail. The DOW had a very negative close that suggests that further downside if forthcoming this week.

With little good news on the horizon, it seems likely that selling pressure will continue. In addition, technical and chart traders had to be disappointed this past week at what happened and are not likely to be aggressive buyers this coming week. As such, the probabilities favor lower levels being seen.

With both the DOW and the SPX at or close to pivotal levels of support, if the selling continues this week, further downside of consequence will likely be seen. The indexes need positive news to rally as the technical and chart support will not be strong this week.