DOW Friday closing price - 12938

The DOW generated the first red weekly close in the last 6 weeks suggesting that the recent upward rally has run its course. In addition, the red close has now caused a bearish Head & Shoulders formation to be built on all charts (intra-week as well as daily and weekly close). Using the weekly closing chart, the left shoulder is at 13232, the head at 13610 and the right shoulder at the previous week's close at 13190. The neckline is at the most recent low weekly close at 12588. If the neckline is broken the formation offers an 11566 objective.

The DOW closed on the lows of the week and further downside is expected to be seen this coming week with 12700 as a likely first objective. The downside is somewhat dependant on the Fiscal Cliff resolution but the trading seen suggests the traders are now convinced that whatever resolution comes out will not be good enough to re-generate the upward rally.

On a weekly closing basis, resistance is minor at 13155, decent at 13190 and decent again between 13232 and 13276. On a daily closing basis, resistance is minor to decent between 12970 and 13030, decent at 13245, and decent to strong at 13350. On a weekly closing basis, support is minor at 12849 and decent at 12588. On a daily closing basis, support is minor at 12878, minor to decent at 12710 and strong at 12542.

The DOW generated several bearish signals this past week starting with a sell signal being given on the daily closing chart on Wednesday (when the index closed below the previous low daily close at 13135), followed by break of the 200-day MA on Friday (currently at 13015) and finishing with a close on the lows of the week and "below" the 13000 demilitarized zone. Much of the bearishness was fundamentally based due to the gloomy prospects for a positive resolution to the Fiscal Cliff issue but technically speaking damage was done to the chart that will require a clearly bullish change to the fundamentals to reverse.

The traders are facing an additional negative in the fact that the DOW has a seasonal tendency to start a correction or downtrend in the first 6 weeks of the year that generally does not end until May or June. This seasonal tendency has been seen in 10 out of the last 12 years and is highly likely to be seen again this coming year due to the overall negative economic conditions seen world-wide.

This DOW closed on the lows of the week and unless some last minute miracle occurs on Sunday when Congress meets to talk about the Fiscal Cliff, the index is likely to head lower on Monday. Minor intra-week support is found at 12932 and at 12765 but below that there is no "recent" support until the low at 12471 seen on November 16th is reached. Some support of consequence is found from an April low at 12710 as well as from the general support at 12700 (300 points below a major number). Nonetheless, with the 12700 level having been broken easily in November, the traders will not feel very confident that support will hold, at least not if the fundamental situation is not beneficial.

On the intra-week chart and exclusively on a technical chart basis, the DOW is expected to get down to the neckline of the H&S formation mentioned above. The neckline, drawing a line between the May low at 12035 and the November low at 12471, comes to be at 12588. It is interesting to note that 12588 is exactly where the "weekly closing low" neckline is found. Simply stated, the index has a high probability of getting down to 12588 sometime in the next 2 weeks unless positive fundamental changes appear.

To the upside, the DOW will now face quite a bit of resistance in the 13000 demilitarized zone (12970-13030) which is further strengthened by the fact the 200-day MA is currently at 13015. In addition, the 50-day MA, which does become a strong line if the index is now in a short-term downtrend, is presently at 13060. Above that level though, the resistance is all minor until the 13300 area is reached. If no solution to the Fiscal Cliff is found the probabilities of the index getting above the 13060 are very low. This is also true if a solution is found but not one that satisfies the market as being a truly positive one.

As I mentioned above, damage was been done to the DOW chart. All chart events do need to be confirmed so the bulls still have a chance to turn things around this coming week. Nonetheless, they will need all the fundamental help they can muster to reverse the negatives from this past week.

NASDAQ Friday closing price - 2960

The NASDAQ generated a red weekly close in conjunction with going below the previous week's low for the first time in the past 6 weeks, suggesting the rally to the upside is now over. In addition, the index gave a sell signal on the weekly closing chart having closed below the previous low weekly close at 2975. The index has underperformed the other indexes during the past few months having also built a bearish Head & Shoulders formation but with a lower right shoulder suggesting a much more bearish outlook if the weekly close neckline at 2853 gets broken.

The NASDAQ closed on the lows of the week suggesting further downside this coming week and in the process closed below the 50 and 200 day MA's as well as below the 50-week MA (all between 2975 and 2990) also causing chart damage to the chart. The index still has a bullish breakaway/runaway gap formation on the daily chart but the action this past week suggests the runaway gap, down at 2928/2936, may be targeted by the bears at the beginning of the week. If the runaway gap is closed, the breakaway gap between 2959/2884 will likely be closed as well putting the index at risk of the neckline of the H&S formation getting broken.

On a weekly closing basis, there is minor resistance at 3010 and decent at 3021. Further decent resistance is found at 3069 and at 3091.On a daily closing basis, resistance is minor at 2990, minor again at 3012 and decent at 3021. Decent to strong resistance is now found at 3054. On a weekly closing basis, support is minor at 2908 and decent to strong at 2853. On a daily closing basis, support is minor to perhaps decent at 2910, minor at 2954 and decent to strong at 2936.

The right shoulder of the Head & Shoulders formation in the NASDAQ has been formed with the previous week's close at 3021. The left shoulder is up at 3091and it should be mentioned that in both the other indexes the right shoulder was either at the same height or in the case of the SPX, higher. The much lower left shoulder is a strong bearish sign suggesting that if the neckline at 2853 gets broken, the index will continue to outperform the other indexes to the downside. The downside objective of the H&S formation is 2424 which means that if achieved the index will have corrected more than 20%, giving a recession signal as well.

It is evident that the bears are looking closely at the NASDAQ as it was the leader to the upside during the past 4 years and therefore would likely become the leader to the downside if a downtrend has started. With a strongly bearish H&S formation and the neckline being reachable as early as this coming week, the index will likely take on added importance. It should also be mentioned that the index does contain arguably the #1 stock in the market in AAPL and the stock is presently trading just a few dollars above an important psychological support at $500, which if broken convincingly would likely bring in additional fundamental selling to the entire market. Already the stock has given strong confirmed signals that the uptrend has been broken and the only thing in question right now is whether the stock is trading sideways or in a new downtrend.

To the upside, the NASDAQ shows minor to decent intra-week resistance at 2987 that is further strengthened by the 200-day MA at 2990. Further resistance will be found at the possible breakaway gap seen a week ago Friday between 3044 and 3022. That resistance level is further strengthened by a decent intra-week high at 3035. Decent to strong resistance is found at 3061. With the confirmed break of the 200-day MA, as well as the close on the lows of the week, the 2987/2990 level will act as strong resistance if no positive fundamental news comes out.

The weekly chart of the NASDAQ shows no intra-week support until 2900 is reached and the support there is considered minor to decent at best. The 100-week MA is currently at 2825 and there is a good probability that the index will be heading down to that level before any chart buying appears.

SPX Friday closing price - 1402

The SPX continues to be the "bullish" index inasmuch as no sell signals or major breaks of support on the weekly chart have yet occurred. By the same token, the index did close on Friday at an important support level (1400) meaning that if another red close is seen next Friday it will join the other indexes in suggesting lower levels will be seen. The index did close on the lows of the week and on an intra-week basis it is highly likely that the 1400 will be broken during the week. Nonetheless, next Friday's close is now pivotal for the index and if a solution to the Fiscal Cliff is found this coming week, the possibilities of the index generating a green close next Friday will be high.

The SPX did give a sell signal on the daily chart on Friday having closed below the most recent low daily close at 1413. Nonetheless, the sell signal does lack a bit of conviction inasmuch as the index is still trading above the 50-week and 200-day MA's, at 1385 and 1390 respectively. It is important to note that this is the index the bulls are using to keep the uptrend intact and on Thursday the index traded below the 1413 level most of the day but the bulls were able to generate enough buying at the end of the day to prevent the sell signal from being given. That was not the case on Friday as the bulls were unable to generate any buying of consequence. Because this is the index the bulls have been defending Monday's action will likely be important inasmuch as the sell signal on the daily closing chart will either be negated or confirmed that day.

The SPX is likely to see further down action on Monday with the 1385/1390 level as the objective. The 200-day MA is currently at 1390 and intra-week support, as well as the 50-week MA, are both at 1385 and that is the most likely downside objective for this coming week. What happens there will play an important role in deciding what happens the next 3 months as a break of both of the MA's will put the stock in a downtrend that will be difficult to reverse. It should be mentioned that below 1385 there is no intra-week support until 1357 is reached.

It should also be mentioned that the SPX also now shows a bearish Head & Shoulders formation with the right shoulder being at 1422, the head at 1474 and the right shoulder at 1448. The neckline is at 1363. The fact the right shoulder is higher than the left shoulder means that even if the index breaks the neckline it will continue to be the most supported index of all. A break of the neckline at 1343 will offer a 1212 objective which is still not a 20% decline in the price of the index. Simply stated, it is evident that the financial sector will continue to be supported up and above any other sector in the market.

To the upside, the SPX will once again show resistance at 1422 and at 1428. The 1422/1428 level has been important, both intra-week and on a daily closing basis, on several occasions for the past 6 years and it is likely to continue to be pivotal for the near term. A daily close above 1428 would not only negate the sell signal but suggest the worst is over. Further resistance is found at 1448 but with no previous history of being resistance, it is likely to be broken if the index is able to close above 1428.

The SPX closed on the lows of the week and further downside is likely to be seen on Monday with 1396/1397 as the "immediate" objective. The index does show some minor but twice repeated support at that price meaning that if the traders still feel bullish about the resolution of the Fiscal Cliff and about the future, that level should hold and generate a rally. A break of that level will likely mean at least a drop down to 1390 if not to 1385 where bulls need to show support or "new" selling will be seen.

The SPX is going to be a big key this coming week as this is the index that for the last 8 weeks the traders have decided to support. Should that support leave, traders will turn strongly negative.

The indexes turned decidedly negative this past week when it became evident that a truly positive solution to the Fiscal Cliff issue is not likely to be seen. Though everyone seems to agree that some solution will be found, certainly by mid January, the consensus now suggests the traders believe it will leave a lot to be desired. One additional negative the traders face is the seasonal tendency for the market to head lower in the first quarter of the year. With few economic positives world-wide, it is to be believed that solving the Fiscal Cliff may not help the market negate the seasonal trend. As such, there is a good possibility that the selling being seen is a precursor to what the traders will be doing, no matter how the Fiscal Cliff issue is resolved.

Nonetheless, the Fiscal Cliff issue still remains a catalyst and if resolved some upside will be seen, if only for a short period of time and perhaps on a limited basis as well. As such, traders continue to trade gingerly without aggressiveness to the downside and will likely continue to do so until some resolution is found. On the other side of the coin, some chart damage was done this past week and if confirmed this coming week with further downside, especially on a weekly closing basis, it could cause the technical traders to jump aboard and generate momentum that would be difficult to stop without a miracle Fiscal Cliff solution.

The probabilities favor further stalling and some kind of temporary "fix" that will push the issue down the road for a few weeks. Such an event will likely put further selling pressure on the indexes but not enough to cause a deep break to occur, such as a break of the neckline of the H&S formations that now exist in all the indexes. I do believe further downside will be seen this week with a drop of about 2% in all the indexes, followed by a short rally thereafter when talks about the Fiscal Cliff issue resurface in the second week of the New Year.