DOW Friday close at 9488

The DOW tested successfully the recent daily high close at 9830 with a high close this past week at 9789. Subsequently the index gave a sell signal on the daily closing chart when it closed below the 9665 level on Friday. This is only the second time since the rally back on March 6th that a sell signal has been given. The last time a sell signal was given was in June/July when the index generated a 791-point correction from the highs (8878 down to 8078).

Having closed near the lows of the week and having no visual intra-day support until 9253 is reached, it is likely that further downside will be seen this coming week, below the lows made this past week at 9430.

On a weekly closing basis, decent resistance is found at 9830. O n a daily closing basis, resistance is decent at 9789 and strong at 9830. On a weekly closing basis, minor support will be found at the most recent low close at 9441 and again minor at 9321. Below that there is nothing until the 50-week MA currently at 8515. On a daily closing basis, there is minor support at the 50-day MA currently at 9461. Decent support is found at 9281 and again at 9135. Support is strong at the 100-day MA, as well as the psychological level, at 9,000.

It is important to note, though, that there is an important difference between the last correction and what is happening now. During the last correction the DOW dropped 791 points without having first re-tested the highs. In such a case and in an up-trending market, the traders had to realize that without a retest of the highs it was unlikely the index had found a top. Once the correction was over the bulls bought the index with confidence. In this particular case where the high has been re-tested successfully, it does suggest the probability of a deeper and longer correction, or even the possibility that at least a mid-term top (3-6 months) has been seen.

The DOW stopped on Friday at a low where no intra-week support has been seen before, in addition, the index closed near the lows of the week. As such, further weakness is likely to be seen this coming week. On an intra-week basis, the closest support is down at 9253 so a drop down near that level is possible and maybe even probable. The previous 11-month weekly closing high at 9325, made last October, will also likely be a bone of contention this coming week as that is a very viable objective for the bears. As far as resistance goes, on a daily closing basis there is decent resistance at 9581 and minor at 9665. Based on last week's trading range, as well as the support/resistance levels, it is possible to see a trading range this coming week between 9253 and 9665 with the probability of a close around the 9325 level next Friday.

Keep in mind, though, that the new earnings quarter season starts on Wednesday, October 7th with AA reporting. With the rally during the last 6 months been largely due to better-than-expected earnings reports, now that the earnings are anticipated to be better, it is possible that negative surprises will be seen, as much of the recovery was due to cost cutting and not sales growth. Such a situation opens up the probability of volatility increasing strongly over the next few weeks and two-way swings occurring, perhaps even on a day to day basis. At these prices and after such a strong 6-month run up, volatility will likely favor the bears.

With everything that is fundamentally on the plate for the traders over the next few weeks, it is very difficult to make a strong determination at this time of where the DOW will be heading to over the next couple of months. Nonetheless, the month of October is likely to be a strong pivot point for the index projecting the likely direction of the market for the next 3-6 months thereafter.

NASDAQ Friday Close at 2048

The NASDAQ, like the DOW, also gave a sell signal on the daily closing chart when the index closed on Thursday below 2091. In addition, the weekly close seen 2 weeks ago at 2133, which was a successful retest of the important 2003 weekly close at 2140, was confirmed this week with another red close. Both of these actions seem to suggest that the index has found a temporary top and is starting a correction.

Nonetheless, on the weekly chart, the index was able to maintain its recent bullish up-trend by holding above the 100-week MA, currently at 2035, on Friday. With the NASDAQ being the only index that has been successful in getting above the 100-week MA on this recent rally, it continues to be the main indicator for the bulls.

On a weekly closing basis, resistance is now strong at 2133/2140. On a daily closing basis, resistance is minor at 2131 and decent to strong at 2146. On a weekly closing basis, support is minor at 2019 and again at 1986. Below that, there is no support until minor support is found at 1859 and strong at 1756. On a daily closing basis, support is decent at 2035 from the 50-day and 100-week MA. Below that level support is minor at 2018 and decent to strong between 1969 and 1970, as well as at 1931.

The comparisons in the chart between the rally in 2003 and the rally this year continue to be uncanny. With the fact that the index was able to confirm a weekly close short-term top at 2133 with another red close this week, the probabilities have increased that a 6 month top has been found much like it was found in 2003. It bears mentioning that in 2003, the index dropped down to a low of 2041 on the second week after the high weekly close at 2140 was made. The low this past week in the NASDAQ was 2041! In 2003, the third week after the high close was made, the index traded intra-week down to 2013 but was able to generate a slightly higher close that week. The index then followed that up with a couple of weeks of sideways trading with an intra-week high of 2095 before resuming its downward correction that ultimately took it down to the 1751 level 5 months later.

It is likely that this coming week, at least during the first couple of days of the week, that further downside will be seen as the index did close near the lows of the week on Friday. There is still an open gap between 2019 and 2023 that is likely to act as a magnet. In addition, there is also the important previous daily high close from which the index broke above recently at 2029, as well as a slew of previous intra-day highs around 2013/2014 that could be seen as well. As such, drops down to the 2013/2019 level seem to be a high probability for the first few days of this coming week. It is difficult to try to analyze what the probabilities are for the index past the first couple of days of the week as the new earnings report season could have a fundamental impact on the market. Nonetheless, if there are no major surprises in the reports, on either side, the probabilities do seem to suggest that a top has been formed and that the NASDAQ is now in a corrective phase.

Possible trading range for this week is 2013 to 2085.

S&Poors 500 Friday close at 1025

The SPX, like with the other indexes, also gave a sell signal when it closed on Thursday below 1044. This is especially important since 1044 represents the previous intra-week high for the entire period of the recession collapse. Closing below that level could end up becoming a failure-to-follow-through signal that if confirmed next week with another weekly close below that level could generate a top of consequence.

It is also important to mention that the recent high at 1075 (1068 on a weekly closing basis) does not represent any previous resistance whatsoever. As such, it is likely to indicate that a fundamental change in the minds of the traders has occurred. Such an event can only be reversed with positive fundamental news.

On a weekly closing basis, there is now decent resistance at 1068 (most recent weekly high close). On a daily closing basis, there is decent resistance at 1063 and strong at 1072 )11-month high close). On a weekly closing basis, support is minor at 1016 and again at 1004. Strong support is found down at 879/882. Below that level there is minor support at 825 and very strong support at 800. On a daily closing basis, there is minor support at 1022 (50-day MA), decent 994 and strong at 979. Below that level there is also minor support at 946 from a previous daily high close.

Having closed near the lows of the week and below the previous high daily close at 1031, prior to the run-up to 1075, the probabilities favor further downside this week. The 1000 level is evidently going to work as a strong psychological support but drops down to that level are possible if the index starts trading below the 50-day MA at 1022, as there is no intra-day support until that level is reached.

Like with the NASDAQ, the SPX is showing a very rare gap between 1016 and 1019 that should be closed this week. The 1016 level does represent some weekly close support, but on an intra-week basis does not mean much. It is possible, much like with the other indexes, that some early week weakness will be seen, followed by some buying after the first earnings report comes out on Wednesday. Intra-day resistance will now be decent at 1039 and therefore a possible trading range for the week could be 994 to 1039.

Due to the sell signals given on the daily closing charts of all the indexes this week the probabilities highly favor that a correction is in process. This is only the second time since the rally began on March 6th that a sell signal has been given. Such an event will likely require a fundamental change to occur before the correction has run its course.

Fundamental news will be the main course this month but news on individual companies is not likely to have much impact on the market unless a general trend is seen, such as last quarter's earnings reports that were 75% positive. It is unlikely that the market will react strongly in one direction of the other until the economic reports of consequence come out, such as the GDP on October 29th. Nonetheless, with the overbought condition as well as the clear indication that a top may have been formed, volatility is likely to be high this month.

This coming week, it is likely that further weakness will be seen the first couple of days of the week. This is due to the fact that a sell signal was generated and that the indexes all closed near the lows of the week and not anywhere near a strong support level. Nonetheless, all bets will be off once the first earnings report comes out on Wednesday afternoon.