DOW Friday closing price - 12231

The DOW continued its "amazing" run this past week making a new 13-week high as well generating the highest 1-month rally "ever" seen before (1880 points so far) overwhelming the previous highest 1-month rally, seen in April 2001, when the index went up a total of 1531 points. In addition, the index is having a "key" reversal month having gone below the previous month's low at 10597 (got down to 10404), making a new 1-year low, and looking to close on Monday substantially above the previous month's high at 11716. There has not been a positive monthly "key" reversal in the index (from a downtrend) in the last 26 years (the farthest my charts will take me) and there has only been "1" other positive monthly reversal (not a "key" reversal) in that period of time, making this month's rally unprecedented in the annals of the DOW's history.

In addition, the DOW gave a failure-to-follow-through signal when it was successful in closing substantially above the weekly close breakdown point generated in July at 11858, suggesting that the drop in prices seen during the summer was not the beginning of a downtrend/recession period but the seasonal correction that is generally seen most every year. If that in fact is proven to be the case, the index is likely to resume the uptrend and take out in November the 12832 yearly high seen in June and putting the index in a position to attempt to make a new all-time high, above 14198, before the end of the year or at the latest the first quarter of 2012.

On a weekly closing basis, resistance is minor to decent at 12391, decent at 12681 and strong at 12810. On a daily closing basis, resistance is very minor 12258, minor to decent between 12391 and 12426, decent to strong at 12724 and strong at 12810. On a weekly closing basis, support is decent between 11858 and 11934, and then nothing until minor support is found at 11509. Below that level, there minor support at 10992, and strong between 10771 and 1081. On a daily closing basis, support is minor to decent between 11898 and 11951. Below that level, there is minor support at 11706 and decent support at 11613.

The DOW closed near the highs of the week and follow through to the upside is expected, especially since there is no resistance found on the chart until the 12391 level is reached. In addition, the index has broken out of 2 bullish flag formations, both of which suggest further upside will be seen starting at the beginning of the week. The most recent flag, which was all generated this past week (flagpole and flag), suggests that a rally up to 12326 will occur. This most recent flag is barely considered a flag as a 2-day flagpole and a 2-day flag barely meets the requirements. The original flag, which was the one using the 10404 low is well built and does give an objective of 12546. Nonetheless, the creation of the second flag seems to dilute and perhaps even negate the formation of the first flag as pauses in the flagpole are not generally seen. As such, the 12326 objective seems to be more probable than the 12546 objective. This is especially true since the index does clearly show intra-week resistance between 12391 and 12450, which with the rare nature of the rally and the extreme overbought condition is likely to be a difficult area to break.

Nonetheless, the extreme bullish nature of the key reversal on the monthly chart, and likely close on the highs of the month (closes on Monday and will close on the high of the Month if no selloff is seen that day) is difficult to ignore as is suggests that at the very minimum the DOW will get up next month to a trendline that is in place at 12685, using the 14198 and the 12876 major highs seen over the past 4 years. If "normal" chart principles are applied to the monthly chart, the index will sweep past that line, past the June high at 12876, and attempt to get up to the 14198 all time high seen in 2007 within the next couple of months.

Once again the chart principles seem to be at odds with the fundamentals as the news that caused this rally is not of a bullish nature, but of a catastrophe-preventing nature, which does not suggest that further upside should be seen fundamentally, at least not at this moment when a worldwide slowdown is occurring and growth is being stunted. The slowdown is probably ever truer considering that Europe will need to throw a tremendous amount of money covering debt to prevent the fringe nations in the Europe from defaulting on their debt, stunting growth and bringing austerity measures. Simply stated, this rally does not make sense, fundamentally speaking.

Technically speaking, the weekly chart does suggest that at the very minimum the February highs at 12391 or the April highs at 12450 will be seen this coming week as the DOW did close on the highs of the week and follow through to the upside should be seen. Such a rally would fulfill most, if not all, of the upside objectives of the weekly chart, including the recent flag formation. By the same token, the index had an inside day on Friday, not rallying but not dropping either and the fact that a 2 flag formation is also now in place does open the door for the index to come in on Monday substantially lower and not accomplish any of the upside objectives.

As far as support is concerned, it is evident that the previous intra-week low at 11555 (11613 on a daily closing basis) that held up for the first 6 months of the year will once again be considered strong support. Nonetheless, the June lows at 11862, as well as the 200-day MA, currently at 11965, will be used as decent to strong support as well, especially now when the DOW has been so successful in going substantially above those levels, giving them renewed strength. A drop back down to the 200-day MA, which also encompasses the 12,000 demilitarized zone, should be seen. Nonetheless, based on the strength seen in this rally the bears are likely to encounter strong buying on such a dip.

There is once again a discrepancy in the charts as the weekly chart suggests a correction back down over the next few weeks and a trading range between 11555 and 12450 will be the most likely scenario, while the monthly chart suggests a minimum rally up to 12685 but a more probable scenario of a break of the recent March high at 12876 and a further rally up toward the 14198 level. Two weeks ago the daily and weekly charts were at odds with each other and the weekly chart prevailed. This time it is the weekly and the monthly chart at odds. My experience tells me the weekly chart still has the highest probability of being correct. There is even a third scenario where the DOW fails to get up to the resistance levels and gives up most of its gains this coming week. The 2 flag scenario might be viewed as more of a failure to accomplish the first flag objective than as a double bullish indicator, suggesting that the index could open up substantially lower on Monday and go from there.

In closing, the DOW now finds itself in a strongly overbought condition, without strong support below, suspect fundamentals, and with a one-of-a-kind rally on its hands that demands continued and aggressive follow through to the upside. It should be mentioned that the normally strong 3-week period seen at the beginning of each earnings quarter will be coming to an end, suggesting that a good part of the buying based on earnings and seen the last 3 weeks will start to dissipate. So the question that will be asked this week is "can the bulls deliver"? As a chartist, my immediate reaction would be to say "yes" as the charts suggest that further upside will be seen, based on what happened this past week and on the bullish key reversal in the monthly chart. Nonetheless, from a fundamental point of view I am once again a doubter, at least from what I know of the fundamentals and what most analysts are saying as well.

With so many different possibilities, interpretations and possible scenarios it is not difficult to understand why confusion reigns. The DOW did positive things this past month that it has "never" done before and factoring that in with fundamental situations that have also never been faced before makes chart or fundamental analysis almost impossible to do. Simply stated, probability numbers cannot be given on anything at this time. It is almost a flip of a coin as to what is likely to happen now, at least without knowing how the weekend fundamental evaluation of the agreement is received on Monday.

I do believe a possible key for Monday will be the double flag scenario and the 200-day MA. A drop below 11965 on Monday, before a rally above 12300 occurs, would be a bearish sign as the flag would be negated, the upside objective unfulfilled and a fundamental sign that the European compromise is not a positive as it appeared to be on Friday. Nonetheless, probabilities favor a rally up at least the high 12300's or low 12400's at the beginning of the week.

NASDAQ Friday closing price - 2737

The NASDAQ shrugged off last week's red close and successful retest of the 50-week MA to surge ahead and make new 3-month highs while breaking above the last MA resistance line, currently at 2680. The index did this in spite of a bearish earnings report and sell off on AMZN as well as a lack of participation in AAPL. In addition, 2 of the main contributors in the past to the strength in the uptrend, FSLR and NFLX, are mired in multi-year lows making the rally in the index that much more impressive.

The NASDAQ broke out of a bullish flag formation on both the daily and weekly closing chart that projects a rally up to the 2920 level and a new 11-year high. The index is only 150 points away from the previous 11-year high seen in May and having moved up 155 points this past week alone could actually get up to the previous high this week if the rally is duplicated.

On a weekly closing basis, resistance is decent at 2833, decent to strong at 2859 and strong at 2873. Above that level there is no resistance until psychological resistance is found at 3000. On a daily closing basis, resistance is minor at 2765, minor to decent at 2799, and decent at 2833. Above that level, resistance is decent to strong at 2858 and strong at 2873. On a weekly closing basis, support is minor between 2637 and 2643 and decent to strong at 2616. Below that, minor support is found at 2595 and minor to decent at 2505. On a daily closing basis, support is minor to decent between 2686 and 2689, minor at 2638 and decent at 2614/2616.

The NASDAQ gapped up on Thursday once again between 2666 and 2694 giving the chart another breakaway/runaway gap formation (the third in the last month). The gap came at the 200-day MA, currently at 2690 and because of that could be the most telling sign of continued upside. Nonetheless, the index did the same thing the week prior, gapping up from the 100-day MA and also causing a breakaway/runaway gap formation, which then in turn was negated on Wednesday after the announcement was made regarding the European agreement. I mention this because this last gap at the 200-day MA is likely to be one of the most important clues this week. With the flag formation offering a 2920 objective and the breakaway/runaway gap formation coming off of an important MA, the index "should" explode to the upside this coming week and not look back. The index is showing an original gap to the downside that was generated on July 26th between 2832 and 2823 that should be the absolute target for this week if this breakout is confirmed on Monday with further upside. Simply stated, the index should move over 100 points in a straight up fashion this week with the upside gap and the intra-week resistance at 2832/2840 as the objectives. Any failure to do that will, especially if this last gap is closed, with be a clear signal that this breakout was bogus.

The NASDAQ will continue to be an important key this week, especially since several of its main components (NFLX and FSLR) have negative fundamentals but are so depressed in price right now that a strong rally could occur in those stocks if the index heads higher and the other two strong components, which seem to be the lifeblood of the market (AAPL and AMZN), both rally as well. As such, the traders will likely use the NASDAQ as the index to watch for clues to the upside.

To the downside, there are 3 keys this week. The first key is the runaway gap down at 2666. If that gap is closed the disappointment will be tangible and likely indicative. The second and third keys are the MA's with the 200-day and 50-week MA both currently at 2685/2690. A daily close any day this week and a weekly close next Friday below that level will be a failure to follow through signal that will likely bring about the same kind of reaction to the downside than was seen a couple of weeks ago when the indexes also gave a failure to follow through signal when support levels were broken.

Technically speaking, the chart is bullish and the probabilities favor continuation of the rally this week with 2840 as the week's objective. Then again, it is likely that the decision in Europe was not only further evaluated this weekend but that some of the details will be given before the market opens on Monday, giving traders a better fundamental idea on how bullish it really is, or not.

SPX Friday closing price - 1285

The SPX, for the first time in a long time, kept pace with the rest of the indexes as the index no longer was the target of the bears due to the fact the decision in Europe mostly affected the banking industry, preventing further reasons for collapse. Nonetheless, the index did not outperform the other indexes either which is indicative that the decision was more of a defensive nature than one that will stimulate growth. The index did generate a break above the 50-week and 200-day MA's, as well as close above the previous weekly close support at 1256 that led the index down for the past 3 months. Such action suggests that further upside will be seen this coming week.

The SPX shows some resistance at 1313 and if there is follow through this coming week that level would be the objective. Nonetheless, that resistance is from 37 months ago and not likely to be respected all that much. As such, if the index is heading substantially higher this coming week the possible objective could be the 3-point trend line on the weekly chart using the all-time high at 1576, the May high at 1370, and the July high at 1356. The trendline is presently at 1342 and is be considered a strong resistance level likely needing positive fundamental news, more likely of a positive earnings nature in the financial industry, to be broken. A 3-point trendline is a valid indicator of a trend and will likely be respected by the traders, especially under the overbought condition that presently exists.

On a weekly closing basis, resistance is minor at 1288, and then nothing until decent resistance is reached at 1343/1345. Above that level, strong resistance is found at 1363. On a daily closing basis, resistance is minor to decent at 1305/1307, decent at 1343/1345, and strong between 1353 and 1363. On a weekly closing basis, support is decent at 1268 and minor at 1239. Strong support is found between 1123 and 1131. On a daily closing basis, support is minor at 1274, minor do decent at 1265, and decent at 1256. Below that, there is minor support at 1229 and at 1200.

The SPX has many stocks that have been under strong selling pressure this year and if this European decision is truly bullish (unlikely), then buying of those stocks will be seen, buoying the index up for further rally. Nonetheless, the 3-point trendline that exists in the index as well as in the DOW does look to be a stopper, at least the first time around. The index has been in a downtrend since 2007, though it has been on a mid-term uptrend for the last 2 years. Breaking of the long-term trendline can only happen if things are truly back to being "bullish". A slow economy will not create the kind of scenario where such a trendline could be broken. As such, 1343/1345 seems to be a level from which further upside will not occur. A rally up to that level, though, is possible and maybe even likely but it would only put an additional 4.5% of value to the index above the closing price on Friday.

Like with all the indexes, the 200-day MA in the SPX, currently at 1274, seems to be a pivotal line. Nonetheless, the index does have 2 very important levels of support that need to be watched closely as a close below both of those levels this coming week would be a strong failure to follow through signal that would likely thrust the index down as fast as it came up. On a weekly closing basis, the 1268 level is the key support but on a daily closing basis, it is 1256 that is important. A close below 1256 any day this week would be a signal that the rally has stalled and a close below both of those levels next Friday would be strongly negative. With the index only closing 30 points above the 1256 level on Friday and having had 71 point trading range this past week, certainly makes that scenario possible.

Probabilities, though, favor the index heading higher this week and possible the following one after that with 1343 as the upside objective. A trading range between 1250 and 1343 for the rest of the year is a good possibility. With the SPX closing at 1285 on Friday, that would mean that there is likely to be more green than red for the next 3 months.

The indexes this past week generated a one-of-a-kind reaction to the upside that was mostly caused by a surprising positive resolution to the European crisis bringing about strong short-covering by traders that sold short thinking such a solution was almost impossible to obtain. Chart-wise, though, the rally caused strong damage to the bear outlook that will be difficult to undo unless it is undone this coming week in one-fell swoop. As it is, details of the agreement in Europe have not yet been released and the "devil" is always in the details. As such, the rally could be undone this week if the Europeans don't come up with the details that prove the game plan is doable.

From a longer term chart outlook, the indexes continue to be in a long-term downtrend, at least the DOW and SPX are, and though there is still a bit more room to the upside (about 4-5% more), it is highly unlikely that the downtrend will be broken at this time, suggesting that the best that can be expected for the rest of the year is a trading range using the last week's closing prices as the pivot point, or at worst a return to the recent low levels seen 3 weeks ago as a retest that a bottom to this recent downtrend has been found.

This coming week is an important economic report week as the always important ISM index report will come out on Tuesday and the Jobs report will come out on Friday. These 2 reports have often been the key to what the indexes do. With the European problem now in the background and nothing more positive coming out of that and the bulk of the earnings reports, especially most of the important one, gone, the traders will turn their attention once more to the state of the economy as the growth, or lack thereof, will be scrutinized. It is evident that this week will be dependent on those reports as well as on the details of the agreement in Europe. The answer to those questions will likely be given this coming week and will likely be a deciding factor in the short-term outlook of the indexes.