DOW Breaks Above 13000! Time to Sell?
DOW Friday close at 13058
The DOW on Friday was able to get above and close above the 13000 level for the first time this year. After having dropped down to 11635 on January, a total rally of 1488 points has been seen over the past 13 weeks. The rally must be considered a bear market correction as the fundamentals have continued to be negative and most of the rally was based on speculation the Fed actions will bring a recovery toward the end of this year or the beginning of next. Such speculation will not begin to be proven true or false for at least another 6 months (at the very earliest) and therefore the indexes remain fragile and prone to changes of momentum, almost on a daily basis.
Due to the lack of hard facts supporting the speculation of an economic recovery, it is my belief that at this time the indexes must be approached through technical and chart analysis (rather than fundamentals) in order to be able to better gauge the sentiment of the marketplace.
The charts seem to be stating that the most likely scenario is a sideways trading range over the next 2-3 months and with the recent move up of 1488 points the top of that range seems to be close.
Most of my analysis is based on charts but there is one tool that I am familiar with, but rarely use, as it does not often come into play. When it does come into play, though, it has often proven to be very useful. That tool is called "the 61.8% Fibonacci number". I was surprised to find that number sitting right in the middle of my chart analysis of the DOW, and blending in almost perfectly.
In my recent chart evaluations of the DOW I have determined that on a weekly closing basis, 13079-13113 (previous weekly low closes of consequence) are quite important and must be considered decent to strong resistance. When you factor in the 50-week MA at 13113 and the 200-day MA at 13052 it suddenly creates a mental picture that this entire area is very important to the DOW and to the immediate future of this recent rally. Keep in mind that these figures are based on weekly closes and do not impact intra-week moves. When I started to measure just how much more could be seen to the upside, on an intra-day basis, I decided to check the 61.8% Fibonacci number and was surprised to see that it fit in perfectly. The DOW saw the high of its up-trend on October 8th 2007 at an intra-day high of 14198 and the low of the correction was seen at an intra-day low of 11635 in January of this year. This was a drop of 2563 points, and if you take 61.8% of that correction into account, it will give you a figure of 1584 points and when added to the 11635 low gives you a potential intra-day high of 13218. Wow, eerie!
I do believe that until the Fed actions of the past begin to generate "actual" results (something that is still in question) it will be very difficult for the DOW to maintain upside momentum without corrections or moves down of some consequence. Picking the top of this recent rally is difficult as no previous highs of consequence are found nearby and previous low closes and MA's are not always reliable. The closest previous high is found at 13387 and it is considered a very minor resistance. Highs of consequence are not found until the 13600 level is seen. Since it seems unlikely that the DOW can get that far without concrete evidence of a major recovery, other means of determining the possible high of this rally had to be used. When all of the above factors are compiled and merged together, what emerges is a powerful picture of what could be a mid to long term top of this recent bear market rally.
Support at this time is found at 12820 and again at 12720, on a daily closing basis and at 12793 and 12657 on an intra-day basis. Weekly support is not found until the 12590 level is seen, on a weekly closing basis.
It is likely that the euphoria of the close above 13000 on Friday will prevail for the first few days of the week and generate some follow thorough to the upside. In addition, it is also likely the index will continue to pivot around that price throughout the week and perhaps into next week as well. Nonetheless, a possible intra-week range between 13218 and 12743 could be seen.
If this evaluation is correct and the DOW is reaching a channel or mid-term top it is likely that it will take at least one week for it to sink in to the psyche of the traders. Some volatility is to be expected but for the first couple of days of the week, it is likely that dips will be aggressively bought and therefore the action will probably be supportive.
NASDAQ Friday Close at 2477
The NASDAQ had a very eventful week after having tested on Tuesday, the 100-day MA at 2400 and reaching on Friday the area of psychological and previous major resistance up at 2500. The one week 100 point move was certainly impressive.
Nonetheless, even though the move was impressive the reality is that NASDAQ did not have any areas of previous resistance of consequence between 2419 and 2500 and therefore the move up was to be expected, once the NASDAQ confirmed its breakout above the 2413 daily close.
The NASDAQ, though, does show an area of very strong resistance starting around 2505 and extending up to the 2531 level that certainly is not only evident but of consequence. Back in Feb07, the index reached a peak intra-day high at 2531 (2525 on a daily closing basis) and just 3 weeks later was back down to 2331, a 200 point move down. In addition, the 2505-2515 level has been a major pivot point (support and resistance) on at least 7 other times during the past 2 years on the daily closing chart and on 4 different occasions on the weekly closing chart. Add to that the fact that the 200-day MA is currently at 2521 and the 50-week MA at 2526 and what you get is an area that looms imposing and difficult to break without fundamental help.
Support is basically non-existent until 2440 level is seen. At that level you have two previous but minor daily closes as well as the 100-week MA. Below 2440 there is nothing of consequence until the 2368-2375 level is seen where you find two strong previous weekly closes and one previous important weekly closing high as well as the 20-week MA and the 20 and 100-day MA's. Strong support on the daily closing chart will be found at 2276.
It is likely that the NASDAQ will attempt to go up to the 2525 level sometime this coming week but contrary to the DOW, this is an index that shows a wall of previous highs that can be relied on to offer stiff resistance. It is very unlikely that without strong fundamental facts to support further upside that level will be broken.
There are a couple of important concerns the bulls will be facing. To begin with the lack of support between 2440 and 2500 means that drops of 60 points from one day to another can happen and that means the risk/reward ratio above 2500 will be negative. In addition, the weekly chart does not show that a true re-test of the 2155 low was ever accomplished and the entire 355 point rally in the NASDAQ is not based on a strong previous support level having been built. Such chart action does not support continued moves to the upside as the buyers face increased risk/reward ratios of consequence.
As with the DOW it is likely the NASDAQ will get some follow through this coming week and intra-day incursions up to the 2531 level are not only possible but probable. Nonetheless, it is also likely that as the index gets up into the 2505-2525 level, on a daily and weekly closing basis, that selling will increase strongly and begin to create top forming action.
S&Poors 500 Friday close at 1414
After having a lot of problems during the week getting above the 1400 psychological resistance level, the SPX was finally able to accomplish that feat on Friday, while at the same time closing above the 100-week MA at 1408 in the process. Closing above 1400 will likely generate some immediate buying as there is no previous resistance of consequence, on a weekly closing basis, above this area until the 1456 level is seen.
Much like with the DOW, the SPX has to rely on previous lows of consequence as well as MA's to come up with levels where strong selling will now likely be seen. Nonetheless, like with the DOW, the 61.8% Fibonacci number also seems to be right in the mix and will likely have an effect on the index.
On the weekly chart, there is a major previous weekly low close at 1433, an important weekly low close at 1441, and a strong previous weekly closing high at 1456. In addition, the 50-week MA is currently at 1444. Using the daily chart, there are quite a lot of previous high daily closes (minor in nature) between 1425 and 1450 and a strong previous daily high close at 1460. In between all of these resistances you will also find the 200-day MA currently at 1433. As I mentioned above, the 61.8% Fibonacci number is at 1457 (61.8% correction from the 1576 high minus the 1255 low). This number will come into play, on an intra-day basis, and means that a rally up to that level would tie in perfectly with all the resistance levels mentioned above. Support will now be very strong at 1374-1378 from a couple of important previous daily low closes as well as from the 20 and 100 day MA which are currently right around that price as well. Below that level, on both a daily and weekly closing basis, there is no support whatsoever until the 1325-1333 level is seen.
It seems likely that for the next few weeks the SPX will likely be trading between 1374 and 1441 with the 1400 level becoming a major pivot point. Intra-day rallies up to the 1450-1457 level are possible but closes should be maintained under 1441. With the index having closed on Friday at 1414, it means that an additional 2%-3% rally from Friday's close is about the most that can be expected.
Ultimately, though, it is probable that the SPX could go back down to the 1325 level over the next month or two.
--------------------------------------------------------------------------------
As I have been mentioning for several weeks, I do believe the indexes are in a sideways trend at best. If that chart evaluation is correct, it also means they are near the top of the trading range at this time and strong selling will once again begin to appear.
It is now evident that the indexes will have to depend on their own as it is likely the Fed will remain quiet for the next few months unless strong weakness comes back. Even then, there is little the Fed can now do as the Fed rate is about as low it is likely to go with the threat of inflation now beginning to hang over the economy. Most of the recent earnings reports have been generally negative even though is some cases have come in better than anticipated. Nonetheless, that is not saying much as the anticipation of good earnings has come down dramatically over the past 6 months.
With the indexes only down a little bit over 10% from the highs of last year but the economy evidently down more than that, it seems unlikely that much further upside will be seen until the fundamentals fit the present speculation of a strong recovery next.
AI
