The DOW is in a bear market scenario but in very oversold condition and in dire need of a corrective phase where. The sellers are probably looking to take profits and re-sell at a higher level where they can control their risk efficiently. With all the bad news hitting the market in the last two weeks there doesn’t seem to be much more news that could affect the market negatively, other than surprisingly bearish earnings reports. Nonetheless, the DOW has been forced to continue to go downward as there has been no positive news of offset the negatives. Until such a time the index reaches levels from the past where strong support is confirmed all rallies will be sold.

It is important to note, though, that the DOW has now gotten to the top of a previous and strong support level between 10700 and 11000 that is of consequence. This support level was in place for 10 months between Nov05 and Sep06 and not likely to get broken easily.

On a daily closing basis, support is decent between 11074-11109, decent again at 10956-10974, and then very strong at 10706-10739. On a weekly closing basis (Friday’s), support is decent between 11088-11109, minor at 11022, strong at 10739, and strong again at 10669. On a weekly closing basis, resistance is decent at 11240-11280 and very strong at 11578. On a daily closing basis, resistance is also strong between 11240 and 11280 and major at 11643.

It is evident that the DOW has now begun to reach levels of support from which a short-covering rally will likely occur. Nonetheless, it is still not known which of the support levels mentioned above will be the one from which the rally will begin. On Friday the DOW closed at 11101 and that was right at the first support level on the weekly closing chart. Whether the index heads down to the next level of support or not, is not something I can tell right now. Certainly a trading range for the next few months between 10700 and 11640 is likely but on a short-term basis nothing has yet been decided.

It is likely that the volatility will continue this coming week but that the trading range will shrink. On an intra-week basis, I can see a trading range this coming week between 10902 and 11335. In looking at the weekly chart I would expect the index to be under pressure at the beginning of the week and go below this week’s low at 10978 down to perhaps 10902. I would then expect the index to show some strength toward the latter part of the week with a rally up to 11335 and close out the week between 11240-11280.

Keep in mind that this is still a bear market and rallies will be met with strong selling. In order to generate a “consistent” short-covering rally up to the 11600 area, it is likely the DOW will have to go through a base building process first. At this moment, there is still a higher probability of a drop down to 10700 first than a rally up to 11600.

NASDAQ Friday Close at 2239

Once again, the NASDAQ is likely to be the chart to follow this coming week as it is the only one of the indexes where the March lows have not been broken. It is evident this most recent fall in the indexes has been caused by higher oil prices, crumbling financial institutions, and inflationary increase in commodity prices. Nonetheless, the NASDAQ has continued to outperform the other indexes by staying above its March lows. It is the only index where supports can be relied upon to give a true picture of how these factors are truly impacting the market.

It is evident that if the NASDAQ breaks down and makes new lows that whatever confidence is left among traders, regarding the possibility of a bottom being in the process of being made, will suffer a strong setback. As such, the NASDAQ must be the index to monitor if you are a bull.

On a daily closing basis, support is major between 2169 and 2177 and some decent support at 2205. On a weekly closing basis, support is major between 2205 and 2212. On a daily closing basis, resistance is decent at 2264-2268, stronger at 2293, and major up at 2354-2371. On a weekly closing basis there is decent resistance at 2300 where the 200-week MA is currently located and major resistance up at 2343. On an intra-day basis, there is an important support at 2203 that was tested on Friday and from which the index generated a strong bounce.

The NASDAQ did get down to 2203 on Friday but a gap between 2201 and 2203 was left unclosed. It is likely that gap will continue to act as a magnet and that it will be closed at some point this week. Intra-day drops down to the 2187-2190 level would then likely happen.

Based on the daily closing chart, it seems probable that the index will be generating a daily close around 2205-2212 at some point this week. It is therefore likely that in the early part of the week some follow through weakness, from last week’s drop, will be seen. By the same token, it also seems probable that if the indexes are reaching at least a temporary bottom, that next Friday the NASDAQ will close higher than this week and give, on the weekly chart, a successful re-test-of-the-lows signal.

Possible range for the week could be 2187 to 2283 with a close next Friday above 2239.

S&Poors 500 Friday close at 1239

The SPX did manage to close on Friday above an important weekly close support at 1236, thus opening up the possibility that if the index closes higher next week that it will seen as a successful re-test of that support level. This was a level that if broken, on a weekly closing basis, would have opened the door to another strong drop in price this coming week. By closing above the 1236 level it likely means the stock is near a short-term bottom from which a rally could occur.

The SPX does have a history of trading for quite a long time at these levels between 1219 and 1298 with breaks up to 1327 and down to 1168. From Oct05 to Sep06 the index traded between 1168 and 1327 but in reality 70% of the time the index traded between 1219 and 1298. It is likely that the same trading range will be seen this time.

On a weekly closing basis, support is strong at 1236 (1219 intra-week), stronger at 1168-1187, and major at 1143. On a daily closing basis, strong support is found at 1236 and then again at 1224. Below that, though, there is some minor support at 1205 and then nothing until the 1168 level is reached. Resistance on the weekly chart is strong at 1288/1289 and major at 1326. Some minor resistance is also found at 1270.

The SPX might give a clue on Monday as to whether the indexes will go below this past week’s lows or not. The charts on the other two indexes do show the probability is high of lower lows being seen this coming week. Nonetheless, the chart does show that if the SPX opens up on Monday at or above 1247 on Monday and does not sell off from there, that the rest of the week will be higher.

By the same token if that does not happen, it is important to note that the 1219 level intra-day is important support and if the indexes want to stage a late week rally, that level needs to hold.

Probable range for the week in the SPX is 1219-1270.

It is likely this coming week will be a transition week where new lows of this move will be made. Nonetheless, it is also likely that the support levels found here will hold up for a few weeks at least and that a short-covering rally will be seen within the next couple of weeks. I see the indexes still being under pressure on Monday and maybe on Tuesday, but by Wednesday rallies should begin to occur.

Expect volatility as the earnings report quarter has begun and each day there will likely be good news as well as bad news. Nonetheless, with the oversold condition of the markets and having reached strong levels of support, there should be enough buying coming in this week to prevent a further strong move downward at this time.