DOW Friday closing price - 11444

The DOW took a major tumble this past week as the economic news continued to be dismal and support levels of consequence were broken. The index had the biggest weekly drop in 16 months and in the process a short-term sell signal was given on the weekly closing chart that will likely take the index lower next week. In addition, if the economic news continues to be as dismal as it was the past 2 weeks, this move down could prove to be the start of a downtrend, though that is still in question.

The DOW broke below the important 200-day MA (currently at 12000) on Tuesday and below the equally important 50-week MA (currently at 11760) on Thursday and the selling became panic stricken as long-term bulls that have enjoyed a 3-year run to the upside began taking profits, abandoning the idea that the market will be heading higher by year's end.

On a weekly closing basis, resistance is minor between 11780 and 11853, minor to decent between 11970 and 12030, and very strong between 12681 and 12810. On a daily closing basis, resistance is very minor at Friday's close at 11444, minor again at 11613, and minor to decent between 11898 and 12000. On a weekly closing basis, support is minor between 11053 and 11100, minor to decent at 11750 and then nothing until decent support is found at 10000. On a daily closing basis, support is minor to perhaps decent between 10978 and 11109 (11000 demilitarized zone) and then nothing until the 10,000 level is reached.

The DOW will likely be under strong selling pressure at the beginning of the week as the U.S. credit rating was lowered on Friday "after" the market close. Though much of that was already anticipated and somewhat factored into the drop seen this past week, there is no way to know as of this writing how much was factored in and how much lower the index will go next week, based on this news alone.

The DOW did break the neckline of the Head & Shoulder formation, mentioned in the newsletter the past 2 weeks, which gives an objective of 10984 and on that alone, the index should head lower. In addition, the index shows minor to decent support between 10917 and 10978 on the intra-week chart, as well as support from the 100-week MA, currently at 11050 thus giving additional reasons for the index to drop down to those levels. Below that, there is also some support from the 200-week MA, currently at 10775 which could hold the index up as the 200-week MA is generally considered to be a major long-term support line. On a "daily closing basis" the support is between 10978 and 11009 and on the weekly chart chart support is between 11053 and 11000. Nonetheless, it should be mentioned that none of these supports are considered strong or even decent-to-strong as the index blew through those levels on the way up and the subsequent drops back down to those levels were somewhat short and uneventful, especially since not enough time was spent at those levels to give them more than minor strength.

There will be 2 questions asked this coming week with the first one being the most pressing on a time basis ("how much of the credit lowering was already factored into the price) and the second one being the most important long-term ("is this just a correction to the long term trend or has a downtrend begun and a double dip recession to come"). With no chart support of consequence being seen between the 11000 level and the 10000 level, it is evident that 11000 is an important pivot point. Reaching the 11000 level means the DOW has corrected 15% from the high at 12875 and though that is a strong drop, a 15% drop is still within the parameters of a correction in a bull market. On the other hand, if the 11000 level is broken and drops down to 10000 occur, that would mean more than a 20% correction will have occurred, which is synonymous with a bear market.

It is evident that Monday will be a major pivotal day, inasmuch as the full effect of the downgrade will be seen on that day. If the DOW is able to hold around the 11000 level then the traders will consider that the news has been mainly factored into the price and that further economic information is needed before a major decision has to be made. If the index is unable to hold around the 11000 level it is likely that computer algorythms to sell will kick in causing further panic liquidations to be seen and pushing the index down toward the 10,000 level.

To the upside, if the DOW is able to hold itself above 11000 on Monday, it should see a round of short-covering occur with 11800 as a potential upside target to be seen within the next 3-4 weeks. The 50-week MA is currently at 11780 and the 100-week MA is currently at 11050 and trading between those two lines, at least on a weekly closing basis, would be the most likely scenario if the index does not collapse on Monday. The trading in that range would likely be seen until further news on the state of the economy comes out. Friday's close at 11444 was not surprising as there is a previous minor resistance there and with the index closing at that price and in the green it could mean that on a daily closing basis that will be the pivot point for the next few weeks.

Before the downgrade on Friday I was leaning toward the DOW getting into a trading range mentioned above, but now I have no strong opinion and will wait to see what happens on Monday. Evaluating fundamental changes, such as the downgrade, is difficult to do. Nonetheless, notwithstanding the news on Friday after the market close, technically speaking the DOW should get down intra-week to the 11000 demilitarized zone with 10984 being a likely objective and bounce up from there. As it is, the index closed at 11444 on Friday and a drop down to 10984 would be a 464 point drop, which could offset what has not factored in already.

Possible trading range for Monday could be 10984 to 11444.

NASDAQ Friday closing price - 2532

The NASDAQ took it on the chin this past week dropping a whopping 2% more than the other indexes. The bigger percentage drop suggests that this break is not only real but that the uptrend is at least temporarily over as this has been the index where most of the money has filtered-to and was likely to be the one where the strongest amount of liquidation were likely to occur. As with the other indexes, the NASDAQ sliced through the 9-month support level and in the process broke all daily Moving Averages (50, 100, and 200) as well as the 50-week MA as well. The index also broke below, intra-week, what is considered a major psychological support at 2500 when it fell down to 2464 intra-day on Friday.

Nonetheless, it was not all bad inasmuch as the NASDAQ managed to rally back on Friday to generate a weekly close at what was previously a very strong to major weekly close resistance level built between Dec07 and Nov10 at 2528/2532, suggesting that the uptrend has not yet been broken. Closing back at the previous resistance level, now considered support, could signal that this drop was simply a strong correction within the uptrend, rather than a change of trend.

On a weekly closing basis, resistance is now minor to decent between 2616 and 2643. Above that level, resistance is decent at 2833 and major at 2873. On a daily closing basis, resistance is minor at 2582 and minor to perhaps decent at 2616. Above that level, there is again minor to decent resistance at 2700. On a weekly closing basis, support is minor at 2528/2530, very minor at 2437 and then nothing until decent to strong support is found at 2252. On a daily closing basis, minor support is minor between 2469 and 2498 and then no support during the last year is found until 2114 is reached.

The NASDAQ continues to be the key to the indexes as it has been the index that has sustained the most buying and therefore it stands to reason that if the trend has changed that it will be the index to receive the most selling. The 2500 level has to be considered important weekly support as the index shows a total of 7 weekly closes (3 low closes and 4 high closes) in that area over the past 4 years. The 2532 level on a weekly closing basis was important this past Friday but if the uptrend is broken but a downtrend has not begun (a sideways trend in effect), then the 2532 level will cease to be important and the 2500 level will replace it.

On a negative note, the NASDAQ dropped 2% points more than the other indexes and if the downgrade that was announced on Friday after the market close brings in more strong selling next week, and the index cannot recover, it will continue to outperform all the other indexes with an immediate drop of another 10% down to the 200-week MA, currently at 2255. It should also be mentioned that the index shows a major double top at 2878/2887, as well as a clear failure to follow through signal when the index broke above the 10-year high at 2861, making this drop very ominous. In addition, the double top and the subsequent break of important support at 2600, gives a downside objective of 2312 which is also the area where a 20% correction (2309) is located. That kind of a drop would suggest a bear trend has started and that a double dip recession is likely.

To the upside, the NASDAQ will now show decent to strong resistance at what was previous a strong weekly close support at 2616. Nonetheless, on an intra-week basis, if the index rallies it is likely to go as high as the 50-week MA, currently at 2645, that was broken this past week. If the index is able to survive the selling that will likely be seen on Monday, the probabilities favor it trading between 2450 and 2650 (2500 to 2616 on a weekly closing basis) for the next few weeks until the next round of economic reports come out. Watch the 2469 level on a daily closing basis for clues this coming week. The index got down to that level intra-day on Friday showing that the level is being closely watched by the traders. A daily close below 2469 would likely be a further catalyst for immediate lower prices.

SPX Friday closing price - 1199

The SPX fell strongly after the index received more negative news regarding the economic situation in Italy and now Spain as well. In addition, a lot of new selling as well as profit taking was generated when the economic news got dismal and the important daily close support at 1256, which had held up the index since December, got broken on Tuesday. With no previous support found until 1173 was reached, the traders got aggressive on the sell side and pushed the index down mercilessly taking the index down to 1168 before buying was found. The index ended up closing at a decent psychological support level at 1200.

The SPX continued to be the weakest chart among the indexes as it closed "below" the previous high weekly closes of consequence at 1217 and 1225, which were the breakout points previously. Unlike the DOW and the NASDAQ which closed on Friday above the same previous highs of consequence, the SPX did not, showing that the economic situation in the world continues to weigh heavily on the thoughts of the traders.

On a weekly closing basis, resistance is minor to decent between 1256 and 1264. Above that level, minor resistance is found at 1298, decent to strong resistance is found at 1343/1345, and strong resistance is found at 1363. On a daily closing basis, minor to perhaps decent resistance is found at 1225, minor at 1256/1264, and minor to decent between 1286 and 1300. On a weekly closing basis, support is minor between 1183 and 1189, minor to decent at 1156, and then nothing until 1066 is reached. On a daily closing basis, support is minor between 1178 and 1180 and then nothing of consequence until the 1050 level is reached.

The SPX has generally underperformed the other indexes and this past week was not different, at least from the point of view of support levels not holding up. It seems the SPX is the whipping boy of the market and that is not likely to change until the banking and financial problems get resolved. Italy and now Spain were in the news this week with possibilities of default and adding to that the downgrade of the U.S. the index will have its hands full trying to cope with all of this without totally breaking down. In addition, the index does not show any previous intra-week supports of consequence at these levels and the traders will have to depend on the 100 and 200 week MA's, currently at 1183 and 1156 respectively, as support. MA's are not generally successful in stopping runaway freight trains. The index did show some minor to perhaps decent intra-week support at 1173 but it can be said that support failed because Friday's low was 1168. As such, the support is this index is frail at best.

It should be mentioned that below 1173, there is not one shred of good intra-week support until 1045/1065 is reached, and therefore if the index starts to break below Friday's low at 1168, which is a very good possibility due to the credit downgrade, it might not stop until those lower levels are reached. Yes, the weekly moving averages at 1183 (100-week) and at 1156 (200-week) might act as support, but then again they are "weekly" moving averages and would not be support until next Friday's close, by then it might be too late. As such, the possibilities of the index going down 150 points intra-week from Friday's close are not insignificant.

It is evident that much will depend on how much of the credit downgrade was already factored in to the prices on Friday. The index did rally about 30 from its low and therefore opening 30 points lower on Monday would not necessarily be all that negative. Nonetheless, if the index opens lower than 30 points, the panic selling will likely prevent any buying from stopping the fall and that would likely spell disaster.

If the credit downgrade was factored in to the prices seen this past week and the SPX holds Friday's lows, or breaks them slightly (perhaps down to the 200-week MA at 1156), then it is probable that the worst of this fall is over and that the index will move sideways to up during the next few weeks awaiting further economic news. Like with the DOW, the index would likely trade for the next couple of weeks between the 50 and 100 week MA's with the upside being the 1256/1264 level. Evidently Monday is going to be a key day.

Continued negative economic news was seen this week with the ISM index, Personal Consumption, and Factory Orders all coming in worse than anticipated. In addition, possible default problems in Europe continue to be in the news giving the banking industry new worries to fret over. Due to the negative economic news the indexes broke down technically causing some panic liquidations and profit taking to occur. More negative news came in on Friday after the close with the downgrade of U.S. credit and though it was widely anticipated it would happen during the week it is difficult to evaluate how much more the news will affect the market on Monday.

It is evident, chart-wise, that the uptrend has run into a big stumbling block with the break of 8-month support levels and the new low for the year seen in all the indexes. Resumption of the uptrend has now become very difficult as the economic mold would likely have to change as good earnings are no longer the only thing that needs to happen to generate further upside. The big question then turns to whether the market is starting a downtrend and going back for a double-dip recession, or whether this is just a pause until things get worked out. It is evident, though, by the downgrade is U.S. credit that the debt is now the main issue and that it needs to be better addressed than it was the last 2 weeks. The problem then lies in the fact that it is highly unlikely that unless another economic catastrophe occurs that the Democrats and Republicans are unlikely to resolve this issue, suggesting that further downside is likely to come.

The opening of the market on Monday is likely to tell the story as the indexes all fell down to critical levels where further downside of consequence would bring in not only panic selling but forced liquidations due to margin calls. Levels of support mentioned above need to hold on Monday in order for the traders to have any confidence in the buy side of the equation. With no support levels of consequence built underneath for at least another 8-10% drop, if it happens it would put the indexes into a 20% correction which is the past has always signaled a change of trend. It should be mentioned that economically and politically the Fed is likely to have its hands tied. Another round of stimulus would likely be seen as more debt being stimulated and that is now the main concern. In addition, it is unlikely that either party could get enough votes to pass anything that has to do with more money at this time. That is what is at stake this coming week and it is possible that many of the questions will be answered on Monday, at least as far as the downside is concerned.