Pivotal Week Ahead. Fundamental News - a Catalyst?

DOW Friday closing price - 16717

The DOW generated a new weekly closing high on Friday, above the previous one made last week at 16606, but once again failed to make a new intra-week high as the index fell short by 14 points of 16735, suggesting that the buying interest continues to be limited. Once again though, the index closed on the highs of the week and further upside is likely to be seen this week but this time with a high probability of making a new intra-week all-time above 16735.

The DOW ended up generating a weekly close at what is considered a "general" resistance area at 16700 (300 points below an even level such as 17000), meaning that there is a decent possibility that next Friday the index will close in the red and show some topping action from where the "sell in May and go away" adage can begin to develop. In the year 2000, the index got up to 11750 and generated a weekly close at 11721, possibly suggesting that the same "general" resistance level will stop the rally this time around.

The DOW will be getting important fundamental news this week in the way of the ISM Index on Monday and the Jobs Reports on Friday but the probabilities favor profit taking occurring after the reports unless they are overwhelmingly bullish (unlikely). In addition, the index has recently been supported by the NASDAQ rally as that index was in need of a retest of its 14-year high, but with that index now having reached the minimum high required for the retest, meaning that the DOW is now likely to move more on its own than as a shadow partner.

To the upside, the DOW only has minor intra-week resistance at 16735 that is likely to get broken early Monday morning. Above that level there is no prior resistance but as the index nears the strong psychological resistance at 17000, the selling is likely to increase. To the downside, the DOW has built decent support around the 16300 level, having been down to that general area 3 times over the past 4 weeks (16312, 16357, and 16340). In addition, the 50 and 100 day MA's are both in that general area as well, suggesting that for the traders it has become a pivot point that if broken would suggest the top is found. Further but minor support is found at 16240 and then the strong support at 16015/16046 that is considered a double low that if broken would likely bring in new selling.

On another note, if the DOW goes above last week's high at 16721 (likely) and then turns around and goes below last week's low at 16607, it would be considered a negative statement, especially because of the level of general resistance as well the fact the economic reports of importance will have come out.

The DOW continues to inch higher but not in an impressive manner as the index is only 129 point higher than where it was on December 31st. The "sell in May and go away" adage has been consistent and dependable in the past and there seems to be no reason why it will not happen again this year. By the same token, the correction itself is more of a summer thing than a May thing, such as was seen in 2011 when the index did not start the 20% correction until July, meaning that it can begin anytime over the next 1-6 weeks. The probabilities favor it starting within the next week or two because after this week there are no scheduled economic reports of importance that can be used as a catalyst due out for another 4 weeks.

NASDAQ Friday closing price - 4242

The NASDAQ had a strong positive week after gapping up on Tuesday between 4186 and 4204 and then getting slightly above decent intra-week resistance at 4246 with a rally up to 4250. The index closed near the highs of the week and further upside above 4250 is likely to be seen, with 4285 being the first target.

The NASDAQ had a volatile day on Friday, having generated a negative reversal day after going above Thursday's high at 4247 and below Thursday's low at 4228. Nonetheless, the index closed in the red but near the highs of the day, suggesting the negative reversal will become a successful retest of the gap area if the index rallies above 4250 on Monday rather than a sign that that the resistance at 4246 will hold.

The NASDAQ has now accomplished the minimum required on the weekly chart to retest the 14-year high at 4371, meaning that from here on in the traders will not have a magnet to draw them higher. By the same token, the action seen this past week does suggest that further upside will be seen and that a rally up above 4300, and perhaps as high as 4344, could still occur. A rally on Monday above 4250, especially if it happens "after" the ISM report comes out at 10:00am, will likely mean a rally up to the next resistance.

To the upside, the NASDAQ will show resistance at 4285, at 4344 and at the 14-year high at 4371. Nonetheless, a break above 4285 would be a strong short-term positive that could generate enough buying to carry the index to the 14-year weekly closing high at 4336 or even to the daily closing high at 4356. A rally up to 4356 would be hugely similar to the 2011 rally that took the index to within 9 points of the previous intra-week high at 2887 and as such has a decent probability of occurring.

To the downside, the NASDAQ will show minor support at the top of the gap area at 4204 and if the index gets above 4250 on Monday, support will also be found a Friday's low at 4222. Should the gap be closed at 4186, the index shows minor intra-week support at 4131 and then nothing until 4035. Further but minor support is found at 4025, at 4021, and at 4014 where the 200-day MA is currently at. Strong intra-week support is found at the year's low at 3946 but any daily close below 3996 would likely mean the index is heading lower. It is important to note that there is a triple bottom on the daily closing chart at 3998, 3996, and 3999 that does suggest that at some point that level will be broken.

The 4246 area in the NASDAQ, give or take a few points above or below, is extremely pivotal as it was a high of consequence in January and a low of consequence on 2 occasions in February. It is also the area where a right shoulder would be built if the index is in the process of building a Head & Shoulders formation. As such, that level has strong meaning in a lot of ways. It is highly likely that if the index rallies on Monday that the 4285 resistance will be broken and that the index will rally up to the low or mid 4300 level.

It should also be mentioned that if the NASDAQ does rally above 4250 this week that it would also be a rally above last month's high at that price and would put the index in a situation that if 4371 is not broken to the upside in June and in July the index goes below whatever low is made in June, that a successful retest of the highs will have occurred on the monthly chart. Such a retest has only occurred once before in the last 5 years and that was the occasion when the index then corrected 20% over the following 3 months.

It is evident that everything is lining up for some major decisions/moves to be made in the NASDAQ over the next 1-6 weeks. The probabilities favor the bears based on the economy (not yet growing enough to support much higher prices) as well as on past history. Expect higher prices this week.

SPX Friday closing price - 1923

The SPX made a new all-time intra-week and weekly closing high and with the index closing on the highs of the day/week on Friday, further upside is expected to be seen. With no resistance above, the bulls will be trying to take the index up to the 2000 level, which must be considered a strong psychological target as well as resistance.

The SPX has now almost doubled in price over the past 2 years (1074 to 1924) and has done it without any correction of more than 10% occurring. Even then, each correction seen since the last big correction of 20% that occurred in October 2011 (7 of them), has been smaller and smaller than the previous one, with the last one seen in April being only 5%. It is evident that the index is overdone to the upside and overdue for a cleansing correction that will allow traders to find a new major level of support and once again consider substantially higher prices.

To the upside, the SPX has no resistance above other than a 3-point uptrend line using the last 3 highs made in December, March, and April that connects presently at 1925. By the same token, another way to figure out a potential upside target is by expecting that the previous all-time high seen in 2007 at 1576 is likely to be tested at some point and considering that the DOW and the NASDAQ corrected 20% in the May to October 2011 period, it would suggest a potential intra-week high this time around could be 1945 as a 20% correction from that price would take the index back down to 1576.

To the downside, the SPX shows support at the most recent low at 1862, especially since the 50-day MA is currently at 1870 and a break of 1862 would suggest the MA line would be broken as well. Since the MA line has been tested successfully on 3 occasions since April 16th but not broken, it would suggest that a break of that line would be a signal that a top to the rally may have been found. Further support is found at 1814 which is the low seen for the past 15 weeks and is the last spike correction low found on the chart. For the past 44 months, the index has not broken a previous spike low on the weekly chart, suggesting that a break of 1814 would be a clear signal that the index is in a strong corrective phase. On a shorter term basis and with the bulls committed to higher prices, last week's low at 1902 can now be consider minor but possibly indicative support.

For the time being, the SPX should be heading higher with either 1925 or 1945 as the upside objective.