DOW Friday closing price - 14799

The DOW generated a classic reversal having gone above the previous week's high at 15300 and then closing below the previous week's low at 14954, suggesting that the index is now into the seasonal correction. The index had a weekly trading range of 652 points and the last time that kind of trading ranges were seen was in the period between July and November 2011 when a correction period occurred in which the index dropped 2347 points from a high of 12751 to a low of 10404 in just 11 weeks. Trading ranges of 600+ points were seen several times during that period.

In addition, the DOW generated what is likely to become a successful retest on the weekly chart of the all-time high at 15542 with the rally this past week to 15340 and the subsequent fall thereafter. All the index needs to go is go below this past week's low at 14688 and the retest will be successful. Having closed near the lows of the week the probabilities are high that the index will break below this past week's low.

On a weekly closing basis, there is minor resistance at 15248 and minor to perhaps decent resistance at 13354. On a daily closing basis, there is minor to perhaps decent resistance at 14865 and decent resistance between 14970 and 15030 (15000 demilitarized zone). Above that level, there is minor resistance at 15176, minor to decent at 15248/15254, and strong between 15383 and 15409. On a weekly closing basis, support is minor at 14547 and then nothing until minor support is found again 14093 and again at 13981. On a daily closing basis, support is minor at 14758, minor to decent at 14537, and minor again at 14421. Decent support is found at the 14000 demilitarized zone.

The DOW was able to generate a small rally on Friday to close near the highs of the day, suggesting the first course of action for the week is likely to be to the upside. On Friday, the index was able to bounce off of the general support area at 14700 (300 points below a major level) and the probabilities do favor the bulls trying to negate what could be considered an overreaction to Bernanke's statement regarding future outlook for reduction of stimulus. Nonetheless, the index has broken support at a moment in time that does suggest that the seasonal correction (sell in May and go away) is finally occurring so even if a small bounce occurs, the probabilities favor further downside of consequence.

It should be mentioned that the seasonal corrections in the past have normally been anywhere from 1000 to 1600 points. A 1000 point drop would take the index down to 14542 while a 1600 point drop would mean 13942. The probabilities favor the previous weekly closing high at 14093 being tested meaning the seasonal correction this year would be around 1500 points.

The third quarter earnings report period starts on July 8th and generally the indexes are supported and/or rally during the first 3 weeks of the quarter, suggesting that the correction in the DOW will be short-lived. Previous seasonal corrections have been swift with most of the damage being done over a period of 3 weeks and with this past week being the first week of the correction, it is likely that the correction will end sometime in the next week or two, which in turn would fit in with the start of the earnings quarter.

To the downside and on the weekly chart, the DOW shows minor support between 14382 and 14440. It should be mentioned that there are multiple lows in that area, suggesting that area will be broken. Next support level is the previous all-time weekly closing high at 14093 that stood up for close to 6 years and that is likely to be tested as confirmation that the uptrend is for real. The support is on a weekly closing basis but intra-week there is a possibility the index could get down as low as 13830 which is where the 50-week MA is currently at. Such a drop would fulfill the average high correction range of 1600 points that is usually seen in these types of corrections.

To the upside, the DOW shows resistance at 14887 (14865 on a daily closing basis) and at 15030 which is where the 50-day MA is currently at. In addition, the index shows 2 previous low daily closes of consequence at 14960 and at 14995, and from which the break of support occurred this week, that will offer decent resistance especially since it is also a strong psychological resistance, the 15000 demilitarized zone.

Based on the indicative break of support in the DOW, and the negative action seen thereafter, the probabilities favor further downside of consequence this coming week. Having had a trading range of 642 points this past week, it would not be surprising to see the index have a 14970 to 14328 trading range, followed once again by a close near the lows of the week suggesting that the following week the previous high at 14093 would be seen.

NASDAQ Friday closing price - 3357

Like the DOW, the NASDAQ also had a classic reversal week having gone above the previous week's high and then closing below the previous week's low. In addition, the index closed an open and important gap from May between 3344 and 3370 that had been considered a strong indicator of continuation of the uptrend. Having closed that gap does strongly support the idea the recent uptrend is over and that a correction of consequence is now occurring.

The NASDAQ has open space below for another 170-200 points as no support was built on the way up after the stock broke above the previous 13-year weekly closing high at 3183. Drops down to that level are likely to be seen even within the confines of a still strong bullish market, especially since the 50-week MA is currently at 3155 and that is a line that is often tested within a strong uptrend.

On a weekly closing basis, there is minor resistance at 3469 and decent at 3498. On a daily closing basis, there is minor resistance at 3400, minor to decent at 3473, minor again at 3491 and decent at 3502. On a weekly closing basis, support is decent at 3202/3206, minor at 3183 and minor again at 3161. On a daily closing basis, support is minor at 3300 and minor to decent at 3203. Strong support is found at 3166.

The NASDAQ is getting the bulk of the selling on this correction and that is indicative as this is the index that has generally led the market to the upside on all uptrend rallies and likely will lead the way to the downside when a correction occurs. The selling in the index was very evident on Friday when it was the only index that closed in the red.

To the upside, the NASDAQ did rally during the day to close in the upper half of the day's trading range, suggesting that some upside above Friday's high at 3377 could be seen this coming week. Nonetheless, the index will run into strong daily close resistance at 3400 which is where a previous double bottom is located and the break of that support is what caused the selling seen last week. It should also be mentioned that the 50-day MA is currently at 3390, giving that area added resistance strength.

To the downside, the NASDAQ shows no support until the 3300 level is reached and even then the support at that level is very minor. The support at 3300 includes a previous intra-week high at 3306 as well as a very minor intra-week low at 3295. It also includes the 100-day MA, currently at 3300. Intra-week highs, minor intra-week lows, and the 100-day MA are generally considered uneventful support levels that are likely to be broken when momentum to the downside is being seen. Much stronger support is found between 3154 and 3200 which includes the 200-day MA, currently at 3175. The 3154 level was an important spike low and it is unlikely that it will be seen as a drop down to that level would be a sign of weakness in the trend. Nonetheless, drops down to the previous weekly closing high at 3183, as well as the 200-day MA, would be viable downside targets within an uptrend.

The NASDAQ broke support, closed a bullish gap, and closed near the lows of the week suggesting that the uptrend is over for the time being. In addition, no close-by support of consequence is seen for another 150 points below, suggesting that the index will need fundamental help to prevent further downside of consequence from occurring. It should be mentioned that the previous corrections of any consequence showed anywhere from a minimum of 3 red weekly closes to a maximum of 6 red weekly closes in a row, suggesting that next Friday the index is likely to close in the red as Friday's close was only the 2nd in a row seen.

SPX Friday closing price - 1592

The SPX generated the same kind of scenario as the other indexes with a reversal week and likely successful retest of the all-time high at 1687 with this past week's rally to 1654. In addition, this past week the index broke and closed convincingly below the 50-day MA, currently at 1618, for the first time this year, suggesting that follow through of consequence will be seen.

The SPX is likely to be the index the traders will be watching closely the next 2 weeks inasmuch as the previous all-time high weekly close that was broken 3 months ago is at 1561 and that is only 31 points below Friday's close. With the DOW's previous high weekly close being 716 points lower and the NASDAQ's being 174 points lower, it does suggest that the traders will take their clues from the SPX as to the strength, or lack thereof, of the correction based on whether the index gives a failure to follow through signal or not. A weekly close below 1561 next Friday would be considered a strong negative.

On a weekly closing basis, resistance is minor at 1643 and minor to decent at 1667. On a daily closing basis, minor resistance is found at 1609, minor again at 1643 and decent at 1651. Above that level, there is minor resistance at 1660 and strong at 1669. On a weekly closing basis, support is minor at 1558/1561, decent between 1553 and 1555, very minor at 1515, and minor to perhaps decent at 1500/1503. On a daily closing basis, support is very minor at 1588 and again at 1582, minor between1545 and 1553 and decent at 1541.

The SPX was able to generate a mini reversal on the daily chart having made a new 7-week low and then closing in the green and in the upper half of the day's trading range on Friday. A rally up to 1597/1600 is expected to be seen on Monday as there is no resistance until that area is reached. Nonetheless, the other indexes are expected to rally up to their 50-day MA's and in the case of the SPX that line is found up at 1618, meaning that a rally up to that line is possible but it if happens would suggest more strength than is expected. The opposite would also be true if the index is unable to get up to that line.

To the upside, the SPX shows minor but indicative resistance at the 1597/1600 level that if it holds will likely bring about strong selling immediately thereafter. Further resistance is found at the 50-day MA, currently at 1618. Additional resistance is found at a very rare gap area in the index between 1624 and 1628. To the downside, the index shows minor support at Friday's low at 1577, which is where the 100-day MA is currently at. Further and more important support is found between 1536 and 1540 that represents the same area in the DOW at 14382 that should be broken because of the multiple lows that exist there. Additional support is found between 1490 and 1510 which does include the 200-day MA, currently at 1507.

The SPX is likely to be the "elephant in the room" the next 2 weeks inasmuch as the index has the potential to give chart signals that are strongly negative. Evidently a weekly close below 1561 (the previous all-time high weekly close) would give a failure to follow through signal and a close below 1500 would be a break of the very important 200-day MA, and all of the above could be seen over the next 2 weeks. A failure to follow signal in the index would not be all that meaningful if the other indexes don't confirm it, but it would generate a lot of questions that would further addle the traders and take confidence away from the bulls.

For the past 4 years since the uptrend began, the SPX has not been the index that has determined the fate of the market so there is no reason to believe that has changed. Nonetheless, for the next 2 weeks what the index does will likely have more meaning than at other times. I do expect the index to rally up to 1597/1600 this week and then proceed to fall over the next 2 weeks down to the 1500-1510 level. A scenario such as that would fit in with what the seasonal correction is likely to cause. Anything above or below that scenario will likely cause attention that could become a monkey-wrench.

The aura of market invincibility came to an end this past week when Bernanke re-iterated that plans to scale back the stimulus program were now totally dependent on what the economy does and that the Fed does believe the economy is slowly but surely improving, meaning stimulus will not be needed as much as before. The news hit the market negatively as the Stimulus program has been the main reason the market has rallied straight up this year and the fact that now the market may have to start thinking about standing on its own caused some panic profit taking to occur. The selloff seen was indicative as there has not been such trading action, especially to the downside, since the latter part of 2011 and with the fact that the "sell in May and go away" seasonal correction is still in the possible time frame, it gave the bears the needed ammunition they have not had all year.

Nonetheless, the news was not really all that bad as the reason for the possible Fed withdrawal is a positive (economy improving) and therefore after a corrective phase to get rid of the overbought and overextended status of the market, the probabilities favor the market coming back, if and when the earnings reports quarter that starts on July 8th continues to show that company profits are on an upswing. The bears will have 2 weeks to accomplish whatever correction is possible but then again previous seasonal corrections have usually taken no more than a few weeks to accomplish, so the time frame does support further downside for the next 2 weeks, followed by whatever the earnings reports show.

With the Fed being the center of attention at this time, the economic reports the next 2 weeks will continue to be seen with mixed eyes, meaning that good reports are bad and bad reports are good. With economic reports generally coming out slightly better than expected recently, it would suggest that the market will continue to go lower.