DOW Friday closing price - 15879

The DOW generated an impressive reversal having gone above the previous week's high and then falling 641 points and closing on the low of the week, suggesting strong follow through may be seen this coming week. The news that caused the drop was not U.S. market related but the traders were looking for some reason to sell and the Chinese Manufacturing numbers as well as strong weakness in the currencies of several emerging market countries gave the traders the catalyst that was needed.

The DOW is now in a position that if there is strong follow through to the downside next week, below the 15703 level, that a sell signal on the weekly chart will be given. It should be noted that the index has not given a sell signal on the weekly chart since July 2011 when a previous intra-week low was broken. With the close on Friday being 15879, all the bears will need to do is push the index down another 180 points this coming week for a sell signal to be generated.

On a weekly closing basis, there is minor to perhaps decent weekly close resistance at 16086 and strong resistance at 16458/16478. On a daily closing basis, there is minor to perhaps decent resistance at 16097, minor at 16257, decent at 16481 and strong at 16576. On a weekly closing basis, support is minor 15755, minor again at 15072 and decent to perhaps strong at 14799/14810. On a daily closing basis, the is minor support at 15821 and decent at 15739. Below that, there is minor support at 15409.

The DOW has now established a top of consequence at 16588, having made that high 4 weeks ago, tested it successfully on 3 occasions, and then given a failure-to-follow-through and sell signal on the daily chart. With 50% of the important earnings reports having come out already and most of them as expected or better, the index failing to make new highs in spite of the fact that the other 2 indexes did, and the 4% drop in price seen in 1 week, it does suggest strongly that there is no fundamental news possible that could cause the index to turn around and make new highs.

The question is no longer whether a correction has begun, but is it the seasonal correction and if so how much of a correction will be seen?

To the downside and on the intra-week chart, the DOW will show "pivotal" support at 15703. Nonetheless, the daily chart does show some minor support at 15791 that does include the 100-day MA, currently at 15750 but moving up. It is highly likely based on the action seem last week that the index will get down to at least 15791 if not down to 15703. A break below 15703 would likely take the index down to the 50-week MA, currently at 15280, which is a line that has not been tested for the past 14 months but will be a prime target is 15703 is broken.

It should also be mentioned that a break of 15703 will be confirmation that the index is into the seasonal correction and that probably means a drop of anywhere from 10-18% in value from the high at 16588 over the next 3-6 months. A 10% correction would take the index down to the 15000 demilitarized zone (14970-15030), and a drop of 18% would mean the index would get down close to the 13700 level.

To the upside, the DOW will not have a lot of problems getting above the previous all-time intra-week high seen in November at 16174, especially since that level now includes the 50-day MA that was broken on Friday. Some minor resistance will be found at the 16000 demilitarized zone and up to a small intra-week resistance at 16058. A close above the 100-day MA, would suggest the drop was an anomaly and likely would cause the traders to turn bullish once more.

A lot of damage was caused to the DOW chart this past week, not only because of the support levels that were expected to hold up got broken but because of the precipitous fall over a period of 2 days. It does need to be mentioned that further damage of consequence will be seen if the support at 15703 breaks. The last time the index started a fall like what seen last week was in Jul/Aug 2011 and on that occasion when the index broke the support at 11862 (much like the support now at 15703) it fell 1143 points that week and ended up falling a total of 2247 points from the high at 12751 over a period of 3 weeks.

What makes the decision even more difficult is that this coming week is full of earnings and economic reports of consequence. The DOW has 7 more important companies reporting (CAT, MMM, BA, CVX, XOM, DD, V) and the NASDAQ has 3 "biggies" in AMZN, AAPL, and GOOG. In addition, the economic calendar includes Durable Goods, Consumer Confidence, and GDP Adv, meanings that the traders will have their hands full trying to put all this information together to come up with a trading strategy.

The probabilities favor the DOW going below last week's low this week but not necessarily breaking the 15703 level, at least not until all the reports are out on Thursday. By the same token, if there are no positive surprises in the reports and the news that caused the drop last week does not change, it is likely that by next Friday the index will be down strongly, more so that this past week. Nonetheless, that scenario is not likely to occur, if it occurs at all, until late in the week.

Probabilities favor more downside on Monday, some upside on Tuesday and Wednesday, and perhaps Thursday, and weakness (possibly strong weakness) on Friday.

NASDAQ Friday closing price - 4128

The NASDAQ generated a reversal week having made a new 13-year high and then closing in the red and on the lows of the week. More importantly, the reversal occurred after the index reached a strong to major level of weekly close resistance at 4246, meaning that it can now be said the index has fulfilled its upside objectives and that the bulls have little more they can shoot for.

The NASDAQ was still the best performer of the indexes this week having dropped only 2.8% in value whereas the other indexes all dropped 3.2 to 3.6%, suggesting that the traders are not yet ready to give up the mantle of invincibility they have been donning for most of the past 4 years. By the same token, it is difficult to say the index outperformed the other indexes inasmuch as NFLX reported much better than expected earnings this week and the stock was up 15% in value while the market was collapsing around it. With AAPL, AMZN, and GOOG due to report this coming week, it is likely the index will maintain its leadership at least until the earnings reports are out.

On a weekly closing basis, minor to perhaps decent resistance is found at 4197. Above that level, decent to perhaps strong resistance is found between 4234 and 4246. On a daily closing basis, decent resistance is found at 4176, minor at 4218 and decent to perhaps strong at 4243. On a weekly closing basis, support is minor at 4062 and decent at 4000. Below that level, there is minor support at 3919, and at 3791, and decent at 3589. On a daily closing basis, support is decent at 4113, minor at 4068 and decent again at 3985/3993.

The NASDAQ may have fulfilled its upside objective with Wednesday's close at 4243 and the intra-week high at 4246. The 4246 level, based on a weekly close, is a level of strong to perhaps major resistance as it was a brick wall in the year 2000, on the way up to 5137 and after the stock fell down to 2800 and bounced up. Having reached that level this past week it can be said that the chart bulls have little to shoot for to the upside and that could be one of the reasons the reaction to the downside was so strong.

To the downside, the NASDAQ shows minor intra-week support at 4097, at 3855, and a bit stronger at 3650, which does include the 50-week MA at that same price. The daily chart though, shows decent support and likely indicative support at the double low built recently at 4103/4097. That area shows additional support from the 50-day MA, currently at 4080, meaning that even if the double low is broken that the fall could be stopped at the 50-day MA, a line that has held well during the uptrend this last year. The next level of support is found at the 100-day MA, currently at 3950, that has not been broken or even intra-day punctured for the past 14 months, meaning that it is a very indicative line. A break of that line on a closing basis, would suggest the index would drop down to the 200-day MA, currently at 3715.

To the upside, the NASDAQ will show resistance at 4177, at 4219 and at 4246. A rally up to 4177 is likely to be seen at some point but whether it will be seen soon or later is not clearly determined yet.

The NASDAQ will be the biggest key this week as the reports on AAPL, AMZN, and GOOG could determine what the index is going to do on a short-term basis. By the same token, the much better than expected earnings report on NFLX that came out on Wednesday and caused the stock to rally 15% in value but was not enough to rally the index, meaning that better than expected earnings on those 3 stocks may not be enough to generate the kind of buying needed to take the index back up.

The probabilities favor the NASDAQ having found a top and starting a strong correction. The 3700 level is a clear objective but evidently not reachable in a matter of days but in a matter of weeks. This coming week could have some volatility seen if and when the fundamental news that came out on Thursday does not generate enough follow through to the downside to break the support levels mentioned above. If those support levels hold, expect the index to rally at least back up to the 4177 level, if not higher. By the same token, by Friday it should all be "said and done".

SPX Friday closing price - 1790

The SPX ended up having a strong negative week having dropped 59 points from the highs seen on Tuesday. The red close on the lows of the week not only suggests further downside will be seen this week but confirms an ominous double top has been built on the weekly closing chart at 1841/1842.

The SPX did give a sell signal on the daily closing chart closing below 1819, as well as a failure to follow through signal on both the daily and weekly chart having closed below the previous all-time high daily and weekly close at 1808/1805. By the same token, no sell signal was given on the weekly chart as the index would need to generate a weekly close below 1775 for that to scenario to occur.

On a weekly closing basis, there is minor to perhaps decent resistance at 1805 and decent resistance at 1841/1842. On a daily closing basis, there is minor to perhaps decent resistance at 1808, minor at 1842 and decent at 1848. On a weekly closing basis, there is decent support at 1775. Below that level, there is minor support at 1690 and minor again at 1667. On a daily closing basis, support is minor at 1785 and 1781 and minor to perhaps decent at 1775. Below that, there is minor support at 1747 and decent between 1700 and 1710.

The SPX is likely to go below last week's low at 1790 this coming week. Immediate downside objective is likely to be the 1779 level that will probably be seen as early as Monday. Nonetheless, between 1767 and 1779 buying is likely to be seen until the important earnings reports (mentioned above) come out. By the same token, a break below 1767, or a close below 1775, will likely generate additional strong selling with 1710 as the objective as that is where the 200-day MA is currently at.

To the upside, the SPX will now find decent selling interest at the previous intra-week high seen in December at 1813. The level is further strengthened by the fact that the 50-day MA is currently at that level as well. Any rally above 1813 will turn the tables on the bears and a new all-time would then be possible, especially since the daily chart shows a triple top at 1849/1850/1849 that will be a magnet if 1813 is broken.

The SPX is facing a pivotal week ahead that is likely to be determined by the end of the week but not likely sooner than that. The probabilities favor the index dropping down to at least 1779 and quite possibly down to 1767 where the support is decent and includes the 100-day MA that has been a stalwart line all year long. Rallies intra-week up to 1813 are also likely to be seen before any decision of further consequence is made by the traders, likely after all the economic and earnings news is out.

It should be kept in mind that the SPX will be taking the role of follower (not leader) since most of the news on the financial front is out. As such, the traders in the SPX will be keeping their eyes elsewhere for clues as to what is going to happen.

The indexes broke down this past week on news from China that the manufacturing sector is seeing negative numbers. In addition, it was brought to the attention of the traders that the currencies of several emerging market countries, such as Argentina, are beginning to weaken and that could cause the dollar to strengthen, meaning the market would weaken. Both of these events became catalysts for selling to occur, possibly helped by the fact that the market is overbought, has been having trouble going higher, and traders uneasy about being long.

Though follow through to the downside is likely to be seen at the beginning of the week, it is unlikely much more downside will be seen until all the economic and earnings reports of consequence due out this week are announced. Durable Goods, 20-city Case/Schiller Index, and Consumer Confidence are due out Tuesday, FOMC rate decision due out on Wednesday, and GDP Adv is due out on Thursday. On the earnings front CAT opens the week on Monday, followed by AAPL after the market closes. AMZN and GOOG come out on Thursday after the market closes. Interspersed among those reports, MMM, BA, CVX, XOM, DD, V, YHOO, F, and FB come out as well. Simply stated, by the end of the week the traders will have a much clearer picture of the state of the economy as well as the outlook for the immediate future.

It does need to be mentioned that the market usually has a seasonal correction of consequence that starts sometime in the first quarter of the year. Most of the corrections over the past 15 years have started either in January or February and it should be mentioned that the one that came in the year 2000 when the index made a 6 year high, started the second week of January, much likely what could be happening now.