This week I will only consider short positions due to the likelihood of the indexes having reached the top of their short covering rallies. This week as well, I am mentioning shorts in only DOW stocks as it is the index that has the most clearly defined resistance level of all.

CAT (Friday Close at 71.76)

CAT has been in a consistent and clearly defined weekly downtrend since July of last year. The downtrend started at 87.00 and only two weeks ago the stock reached a low of 59.60. Major corrections to the downtrend have occurred on two occasions and have been approximately $10-$12 in nature. CAT has not yet shown any type of chart action that supports thinking that the downtrend is over. On the present correction the stock has already moved up $12.57 from the low.

It is possible this last drop could signal that the downtrend is over as the stock has now fulfilled the three-wave scenario that is often seen in trends. Nonetheless, even if that is the case, the stock needs to re-test and confirm the recent low with a drop back down toward the recent lows. It is also possible, due to the severity of the fundamental problems affecting the market, that a five-wave scenario (rather than the 3-wave) could happen and therefore further downside is still a good possibility.

In addition, CAT is reaching strong resistance levels that are likely to hold any further advances and a re-test of support levels and a correction back downward is highly likely.

Resistance is very strong at the 72.64-72.77 level. This area was previously an important support level, on two separate occasions, and should act as strong resistance at this time. In addition, there is a strong prior resistance high at 73.10 as well as the 20-week MA and the 100-day MA coming in right around 72.50-72.60 as well. Minor support will be found at 70.00 but below that there is no support until 67.00 is seen (67.83 on a daily closing basis).

With the indexes also reaching major resistance levels and the marketplace not likely to receive any further help from the Fed for at least one month, the likelihood of CAT, as well as the indexes, heading lower is very high. The downside objective of this trade is difficult to assess with any certainty, as it is not yet known if the trend down is a three-wave or a five-wave scenario, but if the 67.00 level is broken, the stock will likely fall down to the low 62's.

Sales of CAT between 72.00 and 72.60, placing a stop loss at 73.70 and an objective of 67.00, would offer a 4-1 risk/reward ratio. A break below 67.00 would dramatically increase the risk/reward ratio.

My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).

KO (Friday close at 59.26)

KO is a stock that I recently mentioned as a short but got stopped out of the short with an unexpected loss. On that occasion, the stock acted totally against what the indexes were doing as well as from a chart and fundamental point of view. The rally and loss became unexplainable, especially when the stock finally broke down and fulfilled the original evaluation. Nonetheless, the recent chart formation in KO is powerfully bearish and with clearly defined limitations of risk. It is worth considering shorting again.

KO, in December of last year and again in January of this year, was able to close above an important weekly resistance level at 62.00 made back in the year 2000. Tthe recent action of the last two weeks, though, has totally negated that breakout and is now under strong selling and chart pressure due to the failure-to-follow-through signal given.

Failure-to-follow-through signals are often powerful indicators of a short to mid-term trend change and generally offer trades with a high degree of probability. KO has definitely given a failure-to-follow-through signal on the chart and seems poised to drop to the same levels of support seen back in the year 2000.

In addition, the recent action in KO has created an inverted flag formation that if broken (a break below 56.49) would offer an objective of 49.20. The recent drop from 65.59 to 56.49 came over a period of two weeks and severely weakened the chart. The major support at 61.07 and again at 59.86, on a daily closing basis, were broken as well as the 100-day MA. This action gave a strong sell signal and stated that the up-trend that started in January 2006 had come to an end. KO is a stock that has shown over the past 10 years that when it gets into a short to mid-term trend it tends to get to its objectives fast.

Back in 1999, the 60.00 level in KO acted as a strong pivot point for the stock and just recently the same level has shown itself to be just as important as it was in the past. Over the past 3 months, the 60.00 level has been a strong support on two occasions and after it broke the support has already acted as a strong resistance on two occasions as well. Two low closes at 59.86 and 59.98 and a high close at 59.88 support the assumption that the level is strong resistance at this time. In addition, KO rallied a week ago Friday up to 60.34 intra-day, tested the 100-day MA it had broken 3 days before, closed the gap it had left on the way down, and failed to maintain its momentum by closing that day at 58.41.

Support in KO is at the recent low of 56.49 and at the most recent low at 57.24. Underneath the 56.49 level there is little support of consequence until the 50's are reached. Back in the year 2000 on the weekly chart, KO dropped down to the mid 53's on two separate occasions and for that reason alone that level must also be watched. Strong support has been seen around the 50.00 level many times in the past.

Recent closing day action in the stock suggests the stock is ready to move lower this week. For the last 7 days each closing day rally highs have been lower and closing day drop lows have been lower. This suggests the bulls have no strength and that the stock is under constant selling pressure. With the indexes seemingly reaching a probable top to their rally, it seems probable that KO will be dropping down toward the low 50's soon.

Sales of KO between 59.59 and 59.86 and placing a stop loss at 60.44 stop close only and an objective of 53.50 will offer a risk/reward ratio of 9-1. Possibilities of a further drop down toward the 50.00-51.00 level exist and would increase the risk/reward ratio as well.

My rating on the trade is a 7.5 (on a scale of 1-10 with the strongest probability rating being 10).

GM (Friday closing price 28.98)

GM is a DOW stock that back in October of last year had a strong breakout from a 1-year trading range that fluctuated between the mid $38's and the mid $29's. The breakout took the stock up to the 43.20. When the indexes started the most recent downtrend, the breakout faltered and was followed by a failure-to-follow-through signal that ended up causing the stock to break below the strong mid 29's support level and down to a recent low of 21.34. The stock has now rallied back up to test the breakdown level, much like the DOW is presently doing, and should the DOW fail to break through as anticipated, is likely to go back down to re-test the supports as well as recent low.

Resistance in GM is strong between 29.17-29.83 on a daily closing basis (30.00-30.65 intra-day) coming from 5 previous lows closes and two previous high closes. In addition, the 100-week MA is currently at 30.38, the 20-week and 100-day MA's at 30.83 and the 50-weel MA at 31.74. The 20 and 50 week MA recently crossed and the 100-week MA is beginning to move down. All these are very negative signals. Minor support, on an intra-day basis, is found at 26.13 (recent low and 50-day MA), stronger at 24.50 intra-day, and then strong again at the recent low at 21.34. On a daily closing basis there is strong support at 26.29 and 25.50 and major down at 18.83-19.51.

GM is at a point that the next two days will likely determine the strength of the downtrend. A failure to close above 30.00 this week, will likely put a very bearish hue on the stock and could cause the stock to break the recent low and test the mid 19's level. A close above 30.00 will likely generate a rally up to the 32.00 level. That action would still be within a bearish scenario but would likely mean the 21.34 recent low would hold up on the next drop.

Sales of GM between 29.44 and 29.86 with a stop loss at 30.70 and a minimum objective of 24.50 will offer a 4-1 risk/reward ratio. If stopped out I would again be a seller around 31.90 with a stop loss at 32.21, same objective but risk/reward ratio would increase to over 20-1.

My rating on the trade is a 6.5 (on a scale of 1-10 with the strongest probability rating being 10). The rating would be higher except that there is a possibility of a rally up to 31.98-32.10 before the drop occurs. I would again be a seller at that price and the rating would increase to 7.5 using the same objective and a stop loss at 32.21.

JNJ (Friday closing price 63.36)

JNJ seems to have one of the most negative and clearly defined chart scenarios within the DOW group of stocks. JNJ dropped from a high of 68.85 on January 16th to a low of 62.13 on January 23rd, a 9% drop in price is just a few trading days. The recent downtrend does not seem to be over, as the stock has broken support and been unable to negate the break even though the DOW has rallied. In addition, the chart is showing an inverted flag formation, which if broken (a move below 61.72), would project a move down to 57.10. This is a stock that has been, over the past 3 years, in a clearly defined trading range between $57 and $70. With the recent break of support it is likely the stock is heading down to the lower support levels of that trading range.

Resistance is clearly defined between 63.60 and 64.00. Over the past 10 months there have been two major closing highs between 63.60 and 63.80 as well as two major closing lows at 63.91 and 63.95. Such a clearly defined level of resistance likely requires a fundamental piece of news or help from the DOW itself to be broken. Support is minor at 62.13 and then again at 61.73. Major support is found down at 59.77-60.00 level. If broken, the 4-year major support will be found at 56.85.

JNJ has proven itself to be a good chart stock over the years and with the very evident resistance level in the stock as well as with the DOW presents a high probability trade with good risk/reward ratios at this time.

Sales of JNJ at 63.80 with a stop loss at 64.20 and a minimum objective of 60.00 will offer a 9-1 risk/reward ratio. If the DOW is continuing the downtrend, it is likely that JNJ will break the 60.00 support level and drop down to the inverted flag formation objective as well as major support at 57.00. .

My rating on the trade is an 8 (on a scale of 1-10 with the strongest probability rating being 10).