DOW Friday close at 12609

The DOW had a very strong one-day rally last Tuesday of 400 points that took it up to a strong resistance level up near the 12700 level as well as the 100-day MA and the 20-week MA. The index came to an abrupt stop after reaching this level and for the next 3 days of trading basically treaded water in a narrow 170 point range without being able to generate further movement of consequence in any direction.

On Friday, the indexes received negative unemployment numbers that fundamentally speaking should have generated strong selling, but other than a small reaction after the report, the index was able to absorb the negativity and even ended up breaking above the previous day's high and looked good doing it.

In evaluating the daily chart, the formation currently in place in the DOW has the potential for being explosive to the upside, but because of the major resistance level up in the mid 12700's, it sets up for a very defining week this coming week.

Resistance is very strong at 12743-12787. This area, as a resistance level, has been tested successful on 4 previous occasions and with one exception (the rally up to new highs at 14198), the index has generated a strong movement downward after reaching the area. In addition, on this occasion the 20-week MA as well as 100-day MA are both currently right around the mid 12700 level and that makes this level not only a very strong resistance level but a major pivot point as well. Whatever happens this week will probably stay around for for the next few weeks if not months. If the resistance level is broken, there is no resistance of consequence until the 13140 level is seen where the 200-day MA is located as well as a couple of previous supports of consequence that were broken on the way down. Support is presently at 12500 (minor) and at 12110-12099 (strong).

It seems evident that the DOW is at a major pivot point short-term and has built the kind of formation that could break down the major resistance level if the buyers are able to continue to press upward without giving any ground. The daily chart shows a very bullish short-term flag formation with the flagpole being the rally on Monday and Tuesday that started at 12176 and topped out at 12696. The flag has been the recent sideways action between 12696 and 12598. The flag, if broken (a move above 12696), projects a rally of 520 points from the low of the flag at 12528, thus giving an objective of 13048.

This is a powerful bullish formation and one that is needed in order for the bulls to be able to power through the major resistance, on a daily closing basis, up at 12743-12787. Nonetheless, the formation and the major resistance level also sets up a failure-to-follow-through scenario that could be quite bearish as well. Should the flag formation be broken (a print at 12706), it should generate a 2 to 3 day rally up to 13048. If it breaks the top of the flag but fails to break through the resistance at 12743-12787 within 2-3 days, it will be viewed as a strong negative and likely cause a strong sell-off thereafter. Such a failure-to-follow-through signal as well as another failed re-test of the resistance level would likely kill any further attempts to the upside for many months to come or until some strong fundamental news of consequence emerges.

Both sides are now committed to a major battle this coming week and the bulls do have the momentum, chart formation, and probabilities at this time to make this work. Nonetheless, the odds are still at best 50-50 and therefore the end result of that battle is not something I can evaluate with any degree of certainty at this time. I will say, though, that the end result will probably be short-term explosive, in one direction or the other.

NASDAQ Friday Close at 2370

This past week, the NASDAQ was the leader to the upside as it had the strongest percentage rally of all three indexes (5.5%). In many ways, this was anticipated to happen as the NASDAQ had been the "beating boy" during the last few months and in a bear market rally, had the most to "catch up".

The NASDAQ shows a bit of a dichotomy on the charts as there has been no re-test of the lows on the weekly chart and that is not a positive. Nonetheless, on the daily chart, there are several very bullish chart actions in place that offer high probabilities of continuation of the recent up-trend. On the weekly chart the index has moved up over 235 points without any kind of a re-test, either intra-week or on a closing basis. Such a move in a bear market is not conducive to rallies holding up mid-term. On the daily chart the action is slightly different as the index shows two gaps at 2200-2207 and then again at 2290-2305 which might be considered a breakaway and runaway gaps and those don't require re-tests. It is unlikely these gaps will stand up, but for now are giving the index support. In addition, after the first gap there was a move down which could be considered a re-test, especially when it also re-tested the 20-day MA. In addition, the second gap was right above the 50-day MA and that is also bullish. Weekly charts always take precedence over daily charts but it probably means that short-term the index is heading higher but longer term a correction back down will occur.

The NASDAQ does show decent resistance at Friday's closing price of 2371. This level, on a daily closing basis was a former resistance level of consequence back in Apr06 and so far the index has held itself at or below that level. In addition, Friday's intra-day high coincides with a major intra-day low on August 16 2007, which adds to the resistance strength of this level. If a close above 2371 or a rally above Friday's high of 2392 is seen on Monday, the next resistance of some consequence is at 2401-2413. This is not a major resistance but a decent one, especially when you add the psychological resistance you will find at even levels. The 20 and 50 week MA's are currently crossing and are at 2429. That level will likely work as strong resistance as well. The 100-day MA is currently at 2444.

For the time being, a close above or below Friday's close will be short-term indicative, which means Monday is likely to be important. Any daily close above 2371 this coming week should generate further upside to the 2413-2429 level. Failure to close above 2371 at any time this coming week will be a strong negative.

Should the index follow through to the upside, rallies up to the low 2400's will be likely but at that point things get dicey and further upside would likely require fundamental help. A break above 2444 will likely generate a rally up the 2500 level where major resistance is found. Nonetheless, at this time it seems foolish to think that the index could go that high, in a bear market, without ever having tested the lows on the weekly chart.

Like the DOW, the NASDAQ seems to be poised for further upside but it is evident this week will be the deciding factor. Keep a close eye on Friday's close at 2371. A close above that level should get the ball rolling upward.

S&Poors 500 Friday close at 1370

As with the other indexes, the SPX had a strong 55 point rally this week (5%) that took it up to a previous low close of consequence up at 1374. Like the DOW the index came to an abrupt stop after the 1370 level was reached and treaded water for the last three days of trading. Likely awaiting further news or further action next week.

The SPX also shows a flag formation of consequence with the flagpole being from 1313 to 1370 and the flag being the trading range the last 3 days between 1358 and 1380. The flag formation is very short-term bullish and projects a rally up to the 1415 level, should the top of the flag get broken.

Support is found at 1340 from the 50-day MA, at 1325 from the 20-day MA and major support at 1313 from a previous strong low. Resistance is decent at 1374, on a daily closing basis, and then much stronger at 1390-1395 from a previous low close of consequence at 1390, a previous high close of consequence at 1395, and the 100-day MA at 1393. Above that, the 1407-1411 level, from two major low closes in the index, is found and looms imposing.

It seems more evident on the SPXchart than on the other index charts that a decision on whether the market is in a sideways format or still in a bear downtrend will be made this coming week. The short-term bullish chart formation seems to say that its likely the SPX will rally up to the 1390-1411 level this coming week and establish the index is in a sideways trend with a trading range between a low 1310-1325 and a high of 1407-1411. Nonetheless, a failure here at the 1374 level would indicate the index has been unable to turn the downtrend around and is likely to continue to go lower, albeit a very slow and non-aggressive downtrend path.

As with all the other indexes, this week (likely Monday) some decisions will be made. The upside rally up to 1411 has about a 65-35 chance of happening, when based just on the SPX chart.

The mood of the market has changed considerably over the last 10 days, since the Fed lowered the discount rate and helped Bear Sterns out. It seems that traders are now interested in testing the upside to see just how far they can push before they get pushed back aggressively, where that will be is not yet known. The Fed actions have given investors confidence that the Fed will defend the marketplace with all of the tools at their disposal and therefore, at this time, the fear of the downside has been replaced with bargain hunting greed and momentum.

With negative news being ignored at this time, such as the unemployment figures on Friday, it seems traders are focusing more on the future (9 months down the line) when the Fed actions will start to get hold of the market. It seems unlikely that at this time, under this "not-so-gloomy-future" scenario that traders are seeing, that the marketplace will turn strongly negative once more without another Bear-Sterns-like collapse. It will likely require a few weeks of earnings reports, worsening economic data, and sellers stepping up to the plate big time, to see the market get back into a short-term bearish stance, and even then, it will likely be in a controllable fashion. Nonetheless, peaks and valleys are always the norm and not the exception so expect trading on both sides once the limits of the range have been established.

I do expect to get a good idea this week, or at worst two weeks, of what the probable limits of this range I mention up above will be.