DOW Friday closing price - 12820

The DOW broke through the decent to strong supports around 12700 at the beginning of the week confirming that the seasonal correction (sell in May and go away) is now once again a reality. The bulls were unable to get any buying of consequence to come in once the break of support was established and the index closed on Friday at the lows of the week suggesting further downside will be seen this coming week.

The DOW had the biggest 1-week drop since November (482 points) and with no previous intra-week support established on the chart until the 11862 is reached, the possibilities of the index duplicating or exceeding last week's point drop is high. The news from Europe continues to be dismal and with little hope of anything being resolved this coming week, the bears are likely to press down hard while they have the momentum on their side.

On a weekly closing basis, resistance is minor at 12391, minor to decent at 12681, and decent between 12810 and 12849. On a daily closing basis, resistance is minor to perhaps decent at 12569 and decent between 12715 and 12724. On a weekly closing basis, support is decent between 11858 and 11934. On a daily closing basis, support is minor between 12170 and 12200, minor to decent at 11897, and minor to decent again at 11766.

The DOW is facing a test of the important 200-day MA line at 12220 this coming week. The 200-day MA is a strong indicator of short to mid-tem trend strength and since the index has been on a strong uptrend since December the traders will be paying close attention (on a daily closing basis) to that line. A confirmed close below that line this week will signal that this break is not only a seasonal correction but that the short to mid-term trend has changed from up to at least sideways. Under "normal" trading conditions a pop from the 200-day MA back up to test the breakdown point up at 12700 would be expected, even if the correction was to continue on for a few more weeks and/or months thereafter. Nonetheless, there are strong questions right now as to whether this correction is a normal seasonal correction or the onset of a downtrend due to the mounting debt problems in Europe that threaten a worldwide recession. As such, the normal bounce that would be expected to be seen may not occur. That question is what the traders will be keying on this coming week.

The DOW shows no intra-week support until 11862 is reached. With the momentum that is starting to be gathered and the lack of previous support anywhere close-by, other than through MA lines, the index could duplicate last week's drop of 482 points this coming week. That is not to say that on a daily closing basis that much loss will be seen, but with no fundamental reasons for the bulls to buy and no chart support anywhere near, additional selling down to the previous intra-week support is likely to be seen, especially since the so-called "stock of the century" (Facebook - FB) failed to ignite the imagination of the retail masses on Friday when its IPO started trading.

The 200-day MA, on a daily closing basis, is the first level where the traders will get a clue as to what to do, at least from a short-term chart perspective. The second level is down at the 12000 demilitarized zone and down to 11862 as support is "expected" to be found there unless the European debt crisis takes a turn for the worse. The third level is the 100-week MA, currently at 11825, as a confirmed break of that line would open up the possibility of the DOW dropping all the way down to the 200-week MA, currently at 10680. It should be noted that 10670 would be a 20% correction from the high and a close below a 20% correction means that a double dip recession is under way. All of these possible scenarios will be in the minds of the traders this week as they try to decipher/uncover the extent of the problems facing the market at this time.

Based on the action seen this past week I would venture to say that the probabilities favor the DOW dropping down to 11862 where some previous support of consequence, as well as the 100-week MA, is found. I would also venture to say that the index will break and close below the 200-day MA unless some positive news from Europe comes out. After that occurs, if nothing new from Europe comes out, the index is likely to trade back up to perhaps as high as 12700. This all to happen within the next 3 weeks before the next decision point arrives. Ultimately by July if the problems in Europe continue unresolved, there is a good chance that the index will drop down close to the 200-week MA at 10680. A decision at that moment will be made on a Double Dip Recession or a resumption of the uptrend, likely based on what resolution came out of Europe. All of these scenarios, though, are at risk of being negated or increased if any kind of positive or negative resolution from Europe comes out.

NASDAQ Friday closing price - 2778

The NASDAQ gave a failure to follow through signal on the weekly chart this past week having closed decidedly below the previous 13-year high weekly close at 2873, made 13-months ago. Confirmation of the failure to follow through signal is highly likely as the index closed 95 points below the previous 13-year high weekly close and there doesn't seem to be any way that the index could rally that amount this coming week to negate the break.

The NASDAQ fell a strong 5.4% this past week outpacing all the other indexes (DOW fell 3.6% and SPX fell 4.3%) as major profit taking and some new selling was seen. Both of these factors suggest the uptrend seen for the past 7 months is over and that at least a correction of consequence is under way. Having dropped 156 points this past week and with little chance of the break getting negated, a drop of that magnitude could easily be seen again this coming week, especially since this index will likely to continue to receive the brunt of the selling.

On a weekly closing basis, minor to decent resistance is found at 2833 and at 2858 and decent resistance is found at 2873. On a daily closing basis, minor to decent resistance is found at 2858 and decent at 2873. On a weekly closing basis, support is minor at 2737, minor to decent at 2643 and decent at 2616. On a daily closing basis, support is minor at 2762 and then nothing of consequence until decent support is found at 2616.

Support in the NASDAQ begins with both the 200-day and 50-week MA being close by at 2743. Nonetheless, having dropped 156 points last week and closing on the lows of the week suggests those 2 MA will be broken easily, early in the week, and on a closing basis. Such a break would put the bulls in a bind as no intra-week support on either chart is found until 2600 is reached. The support at 2600, though, is a strong support that is not likely to be broken at this time.

The 200-day MA at 2743 is quite important though, as it is also the same area (2737 on a daily closing basis) that the NASDAQ had as strong resistance between Aug11 and Jan12. The fact that both an important MA as well as a previous high daily close of importance are at the same point makes that line a major pivot point as well, suggesting that should the line get broken and confirmed this week it will become a strong resistance level thereafter. With traders always looking at the possible scenarios not only for the present but for the future, they are going to be paying close attention to this area this week. Nonetheless, the present is the present and with the weakness seen and the fundamental weakness yet expected, it is going to be very difficult for the bulls to defend the 200-day MA this week.

The weekly chart of the NASDAQ is even more short-term bearish than the daily chart as other than the 50-week MA, which has been broken often during the uptrend, the index shows no support until 2600 and even that support on this chart is consider decent at best. The weekly chart suggests that the index will break down to 2600 this coming week. The 2600 level, and mostly 2616 on a weekly closing basis, has been a very important pivot point for the last year. The area has served as strong support twice, back in March and June of last year, and as strong resistance twice in September and November as well. As such, with the index under strong selling pressure, it will work as a magnet should the 200-day MA be broken.

As far as the upside is concerned, the NASDAQ shows no resistance whatsoever until the 2840-2873 area is reached. That means that if the bulls are able to pull off a miracle and keep the index from breaking below the 200-day MA convincingly, they could see a rally of 100+ points without much ado. The probabilities based on the fundamental outlook right now do not support that scenario but then again how often has it been seen that fundamentals are ignored.

The outlook for the NASDAQ this coming week is somewhat dire as a confirmed break of 2737/2743 will likely thrust the index down an additional 140 points soon thereafter (perhaps 2-3 days at most). Monday will likely be a pivot point day as reaching 2743 on Monday is a high probability and what happens there will likely set the stage for the rest of the week.

SPX Friday closing price - 1295

The SPX built upon the failure to follow through signal that was given the previous week with a strong 56 point drop this past week, which has not been seen since the third week of November. Having had such a strong point drop suggests that the index could drop this week as low as the 1250-1258 level where decent intra-week support from a year ago is found. Nonetheless, a drop down to that level could also mean that both the 200-day MA, currently at 1278 and the 50-week MA, currently at 1283 could be broken on a daily and/or weekly closing basis and if that scenario happens the index could be at risk of a further downside after that.

The SPX continues to be one of the major keys in the market as this drop is still related to the financial woes seen in Europe. If traders feel that the European debt crisis will worsen and even worse "break-down", it is likely the index will be the first to show such a mood change through the charts. It is important to note that the 1250-1258 level has been important support since 2008 and with a high possibility/probability of the index getting down to that level this week, it does suggest this coming week could be pivotal.

On a weekly closing basis, resistance is decent at 1343/1345 and decent to strong between 1363 and 1370. On a daily closing basis, resistance is very minor at 1326 and decent between 1343 and 1345. On a weekly closing basis, support is minor to perhaps decent at 1285/1288, minor at 1279, and minor to decent again at 1268. Below that level, there is no previous low close support until 1158. On a daily closing basis, support is minor to decent at 1265/1268 and then nothing decent support is found around 1200.

The SPX closed on the lows of the week and is highly likely to get down to the 200-day MA, currently at 1278, as soon as Monday. Nonetheless, there is no previous intra-week support at that level and drops as low as 1258/1262 area also likely to be seen this coming week if there are no positive fundamental changes announced.

The 200-day MA in the SPX has been a very important and indicative line for the past year as it was strong support in June of last year and when broken in August became strong resistance until December when it was again broken to the upside. Based on the chart, a break of the MA, on a daily closing basis, would suggest the index would be under selling pressure for another 3-4 months and trading below the line, currently at 1278. Keep in mind that when the line was broken in August of last year, it broke from 1286 and traded as low as 1074 before recovering and moving up to 1422.

Nonetheless, it also needs to be kept in mind that a break of the 200-day MA must be done on a daily closing basis and even then confirmed with a second close below the line the following day, which does mean the index can drop down to the 1258/1262 level intra-week and then rally enough that same day or the day after and keep the break of the line from happening.

To the upside, the 1300 level in the SPX will now likely be resistance. It is not only a decent psychological resistance but 6 times during the past year the area between 1292 and 1300 was a high or low of consequence (4 times to the upside and 2 times to the downside). It should also be mentioned that the index has not yet confirmed that the 1300 level has been broken. The index did close on the lows of the week and further downside is the most likely scenario for this coming week but there have been many occasions in the past where the index closed on the lows of the week and did not see any follow through the following week. It is unlikely that this could be one of those occasions as the 200-day MA beckons invitingly, but if the index does not immediately see lower numbers on Monday, consideration should be given to the idea that the level will not break.

Probabilities suggest the SPX will drop down to 1258 and bounce back up over the next week or two up to the 1292 level and then decide the longer term outlook based on what happens in Europe.

The seasonal correction "sell in May and go away" has once again proven to be valid as the indexes tumbled below important supports this past week, suggesting that the correction has begun and that further downside is yet to be seen. This is especially true since the fundamental picture continues to deteriorate as Europe's financial woes increase and U.S. corporate profits decrease. The seasonal correction is likely to have its peaks and valleys but the bottom of the correction, if fundamentals don't break down totally, is not likely to be seen until the end of July, suggesting that an additional 8-10 weeks of selling pressure remain.

The debt crisis in Europe continues to evolve in a negative way with the Greeks unable to agree on imposing the necessary austerity measures needed to get the loans. New Greek elections are likely to occur in the first couple of weeks of June but until then the probabilities favor a Greek departure from the Euro. The probability of the new government being against the austerity measures is high, giving the country a higher than 75% probability of departure from the European consortium. Spain continues to get negative attention as their banking situation erodes with bond yields surpassing the 6% mark recently. On an additional note, the highly anticipated introduction of Facebook into the ranks of public companies disappointed as the IPO was unable to generate the kind of retail buying interest that would incite the market into perhaps a new stock buying spree. Such a disappointing debut is now likely to cause investors to sell stocks rather than buy them.

With both fundamental and chart factors looking negative and few positive solutions in immediate sight, the probabilities favor continued weakness in the indexes this coming week. With no scheduled economic reports of any consequence due out until Thursday, the bears will continue to have the edge and are likely to press the market for as much as they bulls will allow them to do.