DOW Friday close at 13408

The DOW had an outside reversal-type day (higher highs and lower lows) with a close in the red on Friday. After trying to break and establish itself above the 20-day MA the index was unable to do so and dropped over 150 points intra-day before settling right at the 50-day MA. It did manage to close above last week's close by about 50 points thus preventing an immediate and further continuation of the recent down trend. Nonetheless the action on Friday and during the week has shown that the up-trend seems to be over and a sideways-to-lower trend has begun.

It is now likely that rallies will be met with heavy selling and the past trend of purchasing dips and "going to the bank" has now become history.

Resistance in the DOW will now be strong at Friday's high of 13525. If there is some positive news and that area is broken then 13625 should pose a lot of problems for the bulls. Drops should find strong support at 13300 and then down at 13260. Nonetheless another drop down to 13260 will create a "triple bottom" and those rarely hold up. Should the 13260 level break there is "minor support at 13210 but below that there is nothing until the 20-week MA at 13000 is reached.

The choppy and volatile action seen over the past two weeks are clear signals that a mid-term top (3-6 months) is now in place. With a 3000 point rally in the DOW since July of last year, a longer term corrective phase is long overdue. The 850-point drop seen in February was stimulated by a short-term manipulated-by-the-government collapse in the Chinese stock market as well as a short-term profit taking binge in the US after a rally of 2100 points.

In February, though, there were no clear chart signals that a top was in place as the DOW had not gone through the topping out action associated with major tops. This time, the DOW has a double top in place as well as a failed re-test of that level. In addition, yesterdays action is one more "nail-in-the-coffin" by having the DOW trying to get above the 20-day MA and failing miserable with a reversal type day. Though it is not yet clear whether the DOW will continue to correct downward it is evident that the up-trend is temporarily over and a sideways-to-down trend is now in effect. Any breaks below 13210 will confirm that a major correction is happening.

Objectives of that correction would first be the 20-week MA at 13000 and if that level does not hold then a re-test of the previous major high at 12795.

NASDAQ Friday Close at 2603

The NASDAQ has been the strongest index during the past few weeks but with yesterday's intra-day rally up to 2627 and reversal-type day, the NASDAQ has built the type of chart pattern that could signal that a top is in place. Yesterday's rally up to 2627 will be considered a failed re-test of the 2635 high if the index closes below 2590.

Confirmation of a failed re-test will also indicate that a potential head & shoulders formation is in place with the left shoulder at 2626, the head at 2635 and the right shoulder at 2627. A break below the neckline at 2560 would give an objective of 2465.

Yesterdays intra-day low in the NASDAQ at 2590 was right on the 20-day MA and a break of that level will likely generate a test of the 50-day MA at 2570.

It is now evident that all the 'pieces-of-a-puzzle" are now in place in the NASDAQ chart. The parameters are very clear. Any rallies above Friday's high of 2627 will be considered positive and likely to generate a new high. A break of 2590 will likely take the index down to a meaningful support at the 50-day MA at 2570. A break of the previous support as well as neckline of the possible head & shoulders formation at 2560 will cause a very negative reaction and likely generate aggressive selling.

Nonetheless, there are a lot of layers of support in the NASDAQ below 2560. The entire area between 2510 and 2535 is filled with important supports, not to mention the least of which is the 20-week MA at 2510. It is evident, though, that a break of 2510 could mean much lower prices so keep that level in mind.

In looking at the indexes the chart of the NASDAQ is the most clearly defined and should be the easiest of the three indexes to trade.

S&Poors 500 Friday close at 1503

The SPX and the DOW have almost identical chart formations but it is important to note that the SPX seems to have been the leading indicator during the past few months to future action of all the indexes.

Though the DOW was able to close at or right above the 50-day MA on Friday the SPX closed below its 50-day MA thus giving a bearish signal. On Wednesday, when the indexes were under strong pressure, the SPX was the only index that actually broke below its major support level at 1487 with a drop down to 1484. Since the SPX has been the leading indicator for the past 4 months these small "details" must be noticed as possible clues to what the indexes will do this coming week.

Strong resistance in the SPX will now be found at 1518 and then again at 1522. Strong support is at 1491. Holding the 1491 level on a closing basis is quite critical as it is the lowest daily closing price since May 2nd. It is important to note that there have now been 3 closes at 1491 on different occasions thus presenting a triple bottom. As I have mentioned before, triple bottoms rarely hold up. There is some minor support at 1484 but below that only the 20-week MA at 1460 and the previous high at 1450 can be found.

All signals in the indexes at this time point to a sideways to down trend. Because of the support levels under the indexes it is likely that a slow deterioration in value rather than a collapse will occur. With the summer doldrums also coming into view it is probably a good time to either take profits on long positions or look to short stocks on rallies.

The information herewith included should only be used by investors who are aware of the risk inherent in securities trading. Mr. De Vito accepts no liability whatsoever for any loss arising from any use of the information and/or comments he supplies.