DOW Friday close at 12800

The DOW greeted the year with a strong implosion that shook the marketplace in its roots. Since 1988 the DOW has sustained January rallies in 17 of those years and only 2000, 2001, and 2003 did the DOW sustain losses. Many investors generally expected that a January rally would occur this year as well. The surprise caught the market by surprise and the result is now a sudden realization that the economy is not only in trouble but that the problem is still in the infancy stage.

In the year 2000, the DOW made a new all-time high the first week of January only to fall over 2000 points by March, in 2001 the DOW dropped close to 1200 points by March, and in 2003 the drop was over 1250 points. It is important to note that in January 2000 a top was made that held up for over 6 ½ years and caused the DOW to drop 4500 points from a high of 11750 to a low of 7197 in October 2002, two years later.

The negative action of the week as well as the close on the lows of the week seems to suggest that next week the downside will continue. If the remaining support levels break, the downside follow-through could cause panic selling to ensue and a drop of some magnitude could be seen. The indexes are on their back and there are very few fundamental reasons that could generate new buying to come in.

There is decent intra-day support at 12724 and then again at 12518. The major support, on a daily closing basis, is at 12743. Should the DOW close below that level any day this coming week, there is no daily closing support until the 12076 level is seen. With the major support being only 60 points lower than Friday's close, the DOW will be hard pressed to hold itself above it. Based on the weak weekly close and the pressure brought to bear this past week the probabilities favor a break. In looking at the chart it would seem that only some positive fundamental news could prevent follow through from occurring.

Even though there is a major intra-day and intra-week low at 12518, a daily close below 12743 would likely generate a drop down to the next support level at 12076. The 12518 level cannot be considered strong support as there was no supportive type action at that price. It was simply a level that generated a rally based on a very short-term oversold condition.

If the DOW is able to hold itself above the support level on Monday and attempt a rally, the 13022-13037 level will now likely act as strong resistance. There are two previous important lows at 13022 and one previous important high at 13037 which will be used by the sellers as a selling area. In addition, the 13000 level, now that it has been broken, must be considered a psychological resistance level and will be difficult to break, under the current fundamental conditions.

In essence, the DOW is likely to continue the downward slide unless some outside news factor of consequence is announced. With the index on its back and the major support level so close and likely to be seen early Monday morning, the probabilities of the DOW being able to survive the selling onslaught are minor.

NASDAQ Friday Close at 2504

The NASDAQ, because of the break of the neckline, on what I consider to be a head & shoulders formation, had the most indicative break of all the indexes. The index not only broke the neckline of the head & shoulders formation but gapped down and proceeded to break two important daily closing supports at 2574 and 2541 in the process. The head & shoulders formation is very rare but, when found, generally indicates a major long-term top to any index or stock.

The index did not totally collapse as the 2496-2500 level, on a daily closing basis, does show good support, much like the DOW at 12743. With the weak close and the momentum totally in favor of the bears, if there is any follow through on Monday (likely) the index will break whatever supports the bulls are relying on and likely generate a panic selling mode.

The 2500 level, both on a daily and weekly basis, must be considered a major support and pivot point and should be used to gauge the severity of the break seen this past week. With the close on Friday being on the lows of the week, follow through selling is likely. It is probable that Monday some form of decision, regarding the short term health, or lack thereof, of the index will be made. I mention short-term because the breaks of support seen on Friday will probably keep the index under pressure long term, and therefore only the short term seems to be in question.

The only question remaining in my mind is whether the indexes will suffer a strong immediate drop this coming week or whether they will simply continue to trend lower in an orderly fashion.

The objective of the break of the head and shoulders formation is somewhere between 2250 and 2300. Nonetheless, there is some very important support between 2343 and 2368 on a weekly closing basis and at 2451 and also at 2341 on a daily closing basis. Resistance should now be decent at the gap point at 2571 and up to 2577 from a previous high.

Monday will likely be quite pivotal for the NASDAQ. Any close below 2496 will add a lot of selling pressure to the index. There is a gap between 2461 and 2466 that would be an immediate target should the stock start trading below 2492 intra-day.

Overall the chart looks very weak and since no buying of consequence came in on Friday, it is unlikely the index will be able to sustain a rally on Monday unless there is some new fundamental information released. If by any chance the 2496-2500 level of support holds on Monday, then an attempt to re-test the breakdown point and neckline of the head & shoulders formation at 2571 could ensue. Based on the strong break seen on Friday, that does not seem to be a strong possibility.

S&Poors 500 Friday close at 1411

The SPX chart looks quite similar to the DOW's chart but this index has a double bottom on the daily closing chart at 1407 (rather than a single one on the DOW chart). With the close on Friday being 1411, it means that the close on Monday at or below 1407 would weaken the chart considerably. In order for that not to happen, the index would probably have to close in the green on Monday. In using the weakly chart, the close below 1433 on Friday was considered a strong break of support and a drop down to the 100-week MA at 1400 is now much more likely. The last previous support in this area, below 1407, is 1387.

The SPX still has a couple of intra-day support levels that might be bothersome to the bears. Intra-day support, found at 1372 and then again at 1364, should be levels that the bulls might attempt to prop up the index. Nonetheless any break of those support levels intra-day, would likely project the index to drop down to the 1234-1254 level. Resistance should now be seen at 1433 and then again at 1446.

In looking at the weekly chart, the 100-week MA, currently at 1400, is likely to play an important role in the decision making process with the SPX. Since 2003, the 100-week MA has not been broken on a weekly intra-day or closing basis. Should that happen next week, a major statement would be made signaling that the index has topped out long term and is now on a well defined downtrend of magnitude. What this all means, is that the SPX cannot afford any decent amount of follow through intra-week to Friday's close.

Should the index get down to the 1372 support level, it would mean the 100-week MA would have been broken and that break might generate such selling pressure that no near-by support level would hold up. If that happens, panic selling would likely ensue.

Based on the strong selling and breaks of support seen this past week it is highly likely the indexes are heading strongly lower. This past week rallies were minimal and no intra-day pops of consequence were seen. The indexes are all under strong pressure, due to the unfolding credit crisis, and there doesn't seem to be any temporary patch that could stop the deepening fear that the market has big problems. Even if the Fed were to step in next week and relieve the pressure with a further interest cut (not something being mentioned at this time), it is not likely to generate enough buying interest to stop further declines in the indexes.

At this moment the biggest question in my mind is whether the indexes will take an immediate hefty move downward or simply go down in an orderly fashion. It is very likely that on Monday the indexes will tell us which of these two options will occur. Should the support levels outlined above break on Monday, it is likely that panic selling will ensue and cause a "Black Monday" type of scenario. If the support levels hold up on Monday, a small recovery rally may occur during the week but even under that scenario, strong selling will likely continue to come in on any rally, and the indexes continue to trend lower.

One word of caution to the bears, myself included, at this time the last strong supports have not yet been broken and therefore the possibility still exists that the indexes may rally out of this hole. The negative scenario outlined is not yet a foregone conclusion. Nonetheless, if the support levels mentioned above break, then it will be time for the bulls to head for the hills.