DOW Friday closing price - 11240

The DOW showed quite a bit of strength early in the week moving up to test the previous daily closing low for the year at 11613 with an intra-week rally up to 11716 and a daily closing high on Wednesday at the same exact price as the previous low (11613). Nonetheless, the bulls did not have the necessary fundamental strength to get the index to go higher in spite of strong momentum seen over the past week and on Thursday, the day after the end of the month, the rally began to deteriorate when the economic reports started coming out as, or worse than expected, causing Wednesday's close to become a successful retest of the previous low, confirming what has already been expected that the uptrend in place since March 2009 has ended.

The DOW fell indicatively on Friday after a negative Jobs report to close below last week's close and near the lows for the week. The red close on the weekly chart has effectively put a stopper to last week's rally suggesting that at best the index is in a sideways trading range between 10500/10700 and 11600 for the next few months, or at worst at the beginning of the next leg down of a downtrend with the end result being a recession signal.

On a weekly closing basis, resistance is minor at 11284, again at 11444, and minor one more time at 11734. On a daily closing basis, resistance is minor to decent between 11444 and 11482 and decent to strong at 11613. On a weekly closing basis, support is minor between 11092 and 11100 and decent at 10817. Below that level there is very minor support 10618 and 10653, minor again at 10150 and 10012, and minor once more at 9931. On a daily closing basis, support is very minor at 11149, minor to decent at the 11000 demilitarized zone (10970 and 11030), and minor again at 10817. Below that level, there is decent support at 10719.

The DOW continues to show a very negative inverted flag formation on the weekly chart with the flagpole being the drop from 12751 to 10603 and the flag the trading range seen over the past 4 weeks up to Wednesday's high at 11716. The recent rally up to the 11716 high did not dissolve the flag formation in fact it strengthened it as the flag is now picture perfect as far as the parameters go (though with a wide flag trading range) due to the volatility being seen over the past 5 weeks. If the bottom of the flag at 10603 gets broken, the objective of the flag would be 9568.

It is evident by the economic news that came out late last week and the action seen on Friday that the DOW is heading lower, at the very least to test the flag trendline which is presently at the 11000 level. Nonetheless, it should be mentioned that with the actual numbers seen over the past 6 weeks (see below), the index is showing strong weakness that gives a high probability rating that a recession is in place and that a drop down to the 10,000 level will occur.

The numbers I mention above are as follows: The DOW is showing red closes on the weekly chart on 5 of the last 6 weeks and the 1-week rally and green close that was seen was only 471 points between weekly closing low and weekly closing high (closing low 3 weeks ago was 10817 and closing high 2 weeks ago was 11284). When compared to the previous 4-week drop of 1664 points from 12681 to 10817, based on the weekly closing levels, the rally seen that 1 up-week pales in comparison with the down numbers and suggests that the index is in a downtrend and that the sideway trading action seen over the past 4 weeks was only a small minor correction upward to relieve the oversold condition while waiting to see if the economic numbers seen the previous month were an aberration or the beginning of a trend. The numbers seen on Thursday and Friday suggest it is a trend!

With no positive news scheduled that the bulls can use to rally the DOW over the next 4 weeks, the best they can do is attempt to stop the index from totally breaking the 3-year up-trend and giving a Double Dip recession signal. A recession signal would be given if the index drops and closes 20% below the high of the move and that would be at 10300. That is still 940 points from Friday's close, but the way the index has been trading recently, a drop of that magnitude could happen in a week or at most 2 weeks and therefore the traders will be closely monitoring the index this coming week, probably even more so on Tuesday when a full complement of traders will be back on the floor, for clues as to how bad the situation really is.

The bulls have 2 main support levels to watch this week with the 11000 area being a decent psychological support that is further aided with 4 previous daily closes in the demilitarized zone from last September on the way up as well as it being where the trendline of the inverted flag formation is currently at (specifically at 10930 on an intra-day basis). Nonetheless, having broken easily below that level a few weeks ago, the bulls do not have much hope in being able to defend that area and might hold on to their ammunition to defend other much more important areas below. Drops down to test the 200-week MA, currently at 10700 are likely to be seen this coming week. The 200-week MA is always a good chart indicator of mid to long term trend, as well as of the health, or lack thereof, of the economy and therefore the traders will be highly likely to target that area this coming week to see exactly how bad, or not, things are. Nonetheless, the drop to that area will not likely be straight down as some decent support will also be found at the most recent daily low at 11801.

The question this week will be how bad things are and how much the Fed can do to help. The first part will likely be reflected in the chart action. The latter is not something that is likely to be answered this coming week. Probabilities favor a drop down by Friday to 10700 with the close above or below that level on that day giving a strong clue as to what the traders believe will happen in the weeks thereafter. The DOW had a 515 point trading range last week and if 10700 is to be seen it would mean that the index would not see any rally during the week above Friday's close at 11240, making the possible trading range being 10700 to 11240 (a 540 point trading range) with all being in the red, as far as the weekly close is concerned.

In looking at any possible positives, if the bulls are successful in defending the 11000 demilitarized zone on a daily closing basis (10970-11030) on Tuesday and Wednesday and a green daily close occurs afterward, one more attempt at the recent highs could be seen, further delaying chart resolution of the economic events at hand. The probabilities are very high the 11000 level will be seen and I don't believe it will hold up, but if it does rallies up to 11529 would then likely occur.

NASDAQ Friday closing price - 2480

The NASDAQ did not give a failure signal on the weekly closing chart, being successful in closing 1 point above the previous week's close. Nonetheless, on the daily closing chart failure signals were given starting with the fact the index "failed" to reach the previous low weekly close it broke down from, at 2616 (contrary to what the DOW achieved), and was stopped by a minor daily close resistance at 2580 when the high daily close for the week was 2579. In addition, the index did generate a possible small "island-type" formation with a gap up on August 29th from 2486 to 2510 and a gap down on Friday between 2543 and 2512. Though that gap is not likely to be considered an island gap due to its jagged nature, the gap on Friday can be considered a runaway gap when seen in conjunction with the gap between 2832 and 2823 seen on July 28th that is considered a breakaway gap.

The NASDAQ did close on the lows of the weeks and further downside is likely to be seen this coming week with the recent triple weekly low area between 2331 and 2337 (seen the first 3 weeks in a row of August) as the likely objective. The index does show some support around the 2459 level with a minor previous low from November 15th at 2459 as well as from the 100-week MA, currently at 2457. Nonetheless, having broken that support, both the intra-week low and the MA, several times over the past 5 weeks, the probability of it holding up is low. Below that area, there is absolutely to support until minor support is found at 2384. As such, you have a scenario that if the index finds itself down more than 21 points down, from Friday's close, at any time during the week, the index will likely be down 100 points soon thereafter.

On a weekly closing basis, resistance is decent to strong at 2528/2530. On a daily closing basis, resistance is minor at 2555 and decent at 25879/2580. Above that level, resistance is decent to strong at 2616. On a weekly closing basis, support is minor to decent at 2341, very minor at 2326, minor at 2212, and minor to decent between 2141 and 2153. On a daily closing basis, support is minor at 2469, very minor at 2419, and minor at 2357. Decent support is found at 2341, minor at 2326 and the minor to decent at 2292 and 2308.

The NASDAQ has no intra-week support on the weekly chart until the 2331/2337 level is reached. Having had a 142 point trading range last week and having closed at 2479, a drop down to that strong support level at 2331/2337, which is 142-148 points lower from Friday's close, is highly possible, and even probable. It is difficult in looking at the daily chart to come up with a pivot point for the week, but if push came to shove to choose one, I would say it is the November support at 2459. Simply stated, a break below 2459 will likely thrust the index down to at least the 2384 level which would be the "next" support on the daily chart. Nonetheless, on the weekly chart that level means nothing and would not likely stop the index from going lower.

The 2331/2375 level has been a previous pivot point of some importance since 2006 as 4 times over the past 5 years that level has either been a high of consequence (twice) or a low of consequence (twice), suggesting that once again that level could be a key to what the index will do in the near future. Drops back down to that level seem likely to occur based on the fundamental news that came out on Friday. Should that level get broken, all kinds of new scenarios come into play as a drop down to the always important 200-week MA, currently at 2240, would likely occur. It should also be mentioned that there is no intra-week support at that level and intra-week drops down to either 2200 or even down to the 2150 level would likely occur if the 2331 level gets broken. It should also be known that a close below 2309 would generate a recession signal as that is the price where a 20% drop from the highs would be seen.

The outlook for the bulls is dismal as the 2 scenarios to the downside are 1) (drop to 2331 = bad) and 2) (drop to 2150 = worse). There is no scenario on the chart that is positive but one possible scenario could have the index trade back up as high as 2530/2555 if the index is able to hold above the 2459 level. Nonetheless, even under that scenario there would be little to gain for the bulls as it would only allow the index to rally as much as 70 points above Friday's close. With such limited upside potential it is highly unlikely that the traders will adopt that scenario.

It is becoming highly likely that a drop down to the 200-week MA is in the cards for the NASDAQ sometime over the next 2 weeks. A test of the 200-week MA, and what happens at that line, will give traders enough chart information to make an informed decision on the probabilities for the last quarter of the year. As such, it is likely the traders feel the "need" to test that line as soon as possible. With such a negative scenario for this coming week and probably until the Fed meeting on the 20th of September, the probabilities are very high that a drop to that level will occur. I do want to mention, though, that there is no support at that level except on a weekly closing basis, and therefore drops down to 2150 or 2195 are likely to be seen.

It is unlikely that the NASDAQ will drop all that much in 1 week but the reality is that 5 weeks ago the index dropped 332 points that week. With the index closing on Friday at 2480, a drop like the one seen 5 weeks ago would put the index around the 2150 level, which does open the possibility of that all occurring this coming week.

Remember, that there are 2 levels of support that are somewhat keys for the week with 2459 being the first (minor support) and the 2331 level being the second (decent support). If those levels break, you can anticipate seeing the index trading around the 2240 level next Friday, which is where the 200-week MA is currently at, but intra-week drops could be seen to a low of 2150.

SPX Friday closing price - 1174

The SPX was once again the weak sister among the indexes as the financial institutions continue to get negative reports. The index underperformed the other indexes in a very clear way inasmuch as the SPX not only failed to get to the previous breakdown low daily close level at 1249, such as the DOW did, but even failed to get up the previous November high daily close at 1225 (closed at 1218) as the NASDAQ did, clearly showing that the traders are very reluctant to purchase financial stocks.

The SPX did generate a red weekly close on Friday, much like the DOW, showing a very minor weekly close rally the week before of only 53 points (1123 to 1176), after a strong drop of 223 points the previous 4 weeks. The small rally suggests that if the index closes below the 1123 level that a drop down to 953 could be seen over the next 6 weeks.

On a weekly closing basis, resistance is decent to now perhaps strong between 1208 at 1218. On a daily closing basis, resistance is minor to decent at 1204 and decent to perhaps strong between 1218 and 1225. On a weekly closing basis, support is minor to decent at 1123, decent at 1066 and strong at 1022. On a daily closing basis, support is very minor at 1159 and decent between 1119 and 1121, and then nothing below until 1047 is reached.

The SPX will once again pivot around the 200-week MA which will be at 1150 next Friday. Nonetheless, the chart now looks bearish with the failure to follow through on last week's green close and therefore the previous week's close at 1123 is highly likely to get broken next Friday and in turn breaking the 200-week MA. In addition, the index has a triple bottom on the daily closing chart between 1119 and 1121 suggesting that level will get broken at some point this week. Keep in mind that a daily close below 1096 will be a recession signal as that is a 20% drop from the highs.

Below 1100 level there is no support until the mid to low 1000's is reached, which means that a recession signal will likely push the index down to test the 1000 level, with a slight possibility the index will get down into the mid 900's as that is a chart objective based on the action seen the last 6 weeks.

Should the SPX show any recovery ability, the 1208 to 1218 level should now be very strong resistance unlikely to get broken without some good news. The probability of a rally back up to those levels is low.

The economic news at the end of last week was very negative and all the momentum to the upside has evaporated, to be replaced with short-term negativity. There are no economic reports this week of consequence and it is unlikely that the Fed will be making any decisions before the FOMC meeting on the 20th. As such, the market is likely to be acting technically this week with a bearish undertone to it based on the slowdown seen in the economy.

The indexes have had big trading ranges during the past 6 weeks and that is not likely to change. With the indexes still closing on Friday in the upper half of the recent trading range it does open up the possibility of a big drop in price this coming week (about 6% in value), just to test the recent lows. Nonetheless, analysts are now predicting that there is a 60% chance of a recession and if that is the case, the market could see another 8-9% drop in value this week (much like what was seen 5 weeks ago) causing the indexes to drop down to the 20% correction level from the 3-year uptrend high, which is the recognized number on the chart for a recession to be tagged as such.

The bulls will be totally on the defensive this week as there is nothing out there in the way of fundamental positives that could help drive prices up. Support levels will be closely monitored and if broken, traders will get more aggressive as the indexes go lower. Very little bargain hunting is likely to be seen as rallies will not be feared but used to sell more. Simply stated, the bulls are likely to be hoping for a miracle this coming week, simply to prevent a big collapse. Probabilities favor the bears winning out this week.