After falling all the way down to 12443, a drop of 694 points, the DOW was able to generate a weak rally back up to 12727 this past week (a 40% recovery). In the process the index failed to get up to the now again major resistance level at 12743 and on Friday, by closing in the red, confirmed that the daily closing resistance at 12650 is strong as well. In addition, the rally this past week was anticipated as it is the end of the month and companies do a lot of “window dressing” thus causing the DOW to close on a positive note.

Resistance in the DOW is very strong, on a daily and weekly closing basis at 12743. Resistance is now also strong at 12650 but only on a daily closing basis. The last time the DOW closed at 12650 and then closed in the red the following day, the index dropped down to 12270 (12302 on a daily closing basis) within a week. On a daily closing basis, there is some minor support at 12480, a bit stronger at 12302, then again at 12182-12216, and major at 11971.

In looking at the weekly chart, if the top of the sideways trading range has been seen, it is likely the DOW will be trading between 12743 and 11971 for the next 4-6 weeks. Whether it is heading down to that lower level or up to the 12743 first is not clear. Based on the failure of the index at 12650 on Friday, I believe the downside target will come first.

One interesting fact I researched this weekend:

Over the past couple of years, when the NASDAQ outperforms the DOW it is usually a bear signal. During the last 2 years, the last 4 tops seen in the indexes were all preceded soon before with a stronger-than-the-DOW NASDAQ. With the NASDAQ coming within 21 points of last week’s intra-day high at 2551 and flirting at the end of Friday’s session with the close made two weeks ago at 2529 and the DOW still trading 400 points below last week’s high and closing 390 points lower than the close two weeks ago, it can be said the NASDAQ totally outperformed the DOW this week.

The action in the DOW this past week was weak and with the end-of-the-month window dressing done, it is likely the index will be heading lower from here. Nonetheless, if the NASDAQ is able to punch through its resistance level on Monday, the DOW could rally up to the 12743 level first. It is my belief, though, that the NASDAQ will fail and that the DOW will head lower next week. I also believe the DOW will be trading in a sideways range between 11971 and 12743 over the next few weeks. The scenario I envision is that the lows will be visited first and then a short covering rally will ensue that will take the DOW back up to its major resistance level at 12743 later on this month. It is likely the action on Monday will “tell the story”.

NASDAQ Friday Close at 2522

The NASDAQ was definitely the strong sister this past week as the index was able to recover 83% of last week’s drop and closed less than 1% from the close two weeks ago. Nonetheless, the close was once again right at the 200-day and 50-week MA’s and if it fails to follow-through to the upside next week will be considered simply a successful re-test of the recent high as well as of the MA’s.

Another negative note, is that it has been seen in the recent past that when the NASDAQ outperforms the DOW it usually means the indexes, in general, are ready to take a tumble.

This past week, using the high and the low of the week, the NASDAQ traded between the 50 and 100 week MA’s as both levels were touched intra-week. No re-test of the March lows on the weekly chart has yet been made and the chart seems to be saying that if the index fails to rally higher this week, that re-test will not be long in coming. In addition, the strength seen on Friday fell short of accomplishing a new 5-month high, on both the daily and weekly charts, and in conjunction with the failure to close above the moving averages, seems to make the index lean toward going lower this week. Unless some positive fundamental news is released the daily and weekly closes should be lower this week than last week. .

Resistance, intra-day, is strong at 2551 and on a closing basis at 2529. Support is not found until the 2440 level, on a daily closing basis, is seen (2430 on an intra-day basis). After that there is no support of consequence until the 2362 level is seen where the 100-day MA, a minor previous low, as well as the possible runaway gap is found. There is also some support at 2400 from the 50-day MA as well as psychological.

The chart on the NASDAQ has three gaps that are presently open and are likely to be in the minds of the traders. The closest gap is above the index up at 2571-2592. This gap is likely to have been driving up the stock recently. With the high last week at 2551 and this week’s high at 2530, it is evident the traders are trying to get that gap closed. If there is any follow through strength this week and the 2551 resistance level gets taken out, it is highly likely a rally up to 2592 will ensue to close the gap. By the same token there are two gaps below that have been acting as a breakaway and runaway gap. The first gap is at 2291-2313 and the second gap is at 2348 and 2362. Should the index break down this coming week, it is likely those two gaps will become magnets and the traders will shoot for closure of both of them.

It is more evident in the NASDAQ than in the DOW that this week will be important for the immediate short-term (1-2 weeks). A rally in the NASDAQ above 2551 will give this index further strength for a rally perhaps as high as the low 2600’s. By the same token, should the index close in the red on Monday, especially below 2500, the drop down to 2440 should be swift.

I do believe that because the NASDAQ has the most important and closest levels on the chart, that all decisions on the indexes this week, should be made by looking at the NASDAQ chart.

S&Poors 500 Friday close at 1400

This past week the SPX was successful in testing the support down at 1374-1376 as well as the 50-day MA at the same price. The index then generated a rally back up the important psychological pivot point at 1400 as well as the 20-day MA, also at the same price. The rally, when compared to last weeks drop of 64 points was weak and did not accomplish enough for the bulls to feel comfortable. The index did trade this week between the 20 and 50 day MA’s but was not able to accomplish close above or below either of them.

The SPX chart is looking bearish but seems to be presently in a trading range between the 50 and 100 week MA’s at 1364 and 1417 respectively. Like with the DOW, it is not clear which of these two levels will be seen first. The failure on Friday to go above the previous day’s high at 1406, I believe is indicative that the index will have a lot of trouble this week getting above 1407 and therefore, unless some positive fundamental news comes out, it is likely the index will be heading lower.

Resistance, on a daily closing basis, is decent up at 1406-1407 and then strong at 1417-1422. Support is strong at 1374-1376, decent at 1384, decent again at 1364, and major at 1325-1331.

The relative weakness of the rally this past week seems to state that now that the end-of-the-month window dressing is over, that the bears will once again be in control. I do believe the 1407 level as well as the 1384 level will be the “keys” this week. A break above or below each of those levels should generate a 15 to 20 point move in that direction.

The SPX has often been the chart leader among the three major indexes but at this particular time, the index is not giving any well-defined clues as to which direction will come first. It is evident, though, that the chart picture in the SPX seems to state that a drop down to the 1325-1330 is the most probable scenario for the next couple of weeks.

Unless strong fundamental news comes out, changes of trend tend to take several weeks to become effective as re-tests of the previous trend are not only likely but necessary. During this period of time, trading becomes difficult, as two-way action is the norm. It is important to note, though, that the NASDAQ has outperformed both the DOW and the SPX for the past couple of weeks, and in the recent past that has been a signal that the indexes are soon heading south.

The sell signal given two weeks ago is still in effect and it is up to the bulls to prove otherwise. Resumption of the short-term downtrend should come this week.