DOW AND S&P 500 GIVE SELL SIGNALS -- NEXT SUPPORT IS AT 200-DAY AVERAGES -- WHY 1140 IS IMPORTANT SUPPORT FOR THE S&P 500

NASDAQ HEADED TO 200-DAY AVERAGE ... The Nasdaq market has suffered the most technical damage of all the major stock indexes. Yesterday I showed the Nasdaq market having broken a five-month up trendline drawn under its August/October lows. It's now headed toward its 200-day moving average and its October peak around 1975. That would also represent a 50% retracement of its August/December advance.

Chart 1

DOW GIVES P&F SELL SIGNAL ... The Dow ended the week beneath 10400 for the first time since early November. It's also headed toward its 200-day average. The point & figure boxes in Chart 3 show that the Dow has given its first "sell" signal since last November.

Chart 2

Chart 3

S&P 500 ALSO GIVES P&F SELL SIGNAL... The S&P 500 closed beneath 1170 for the first time in over two months. As a result, its point & figure chart has also given a sell signal (when the last column of o's breaks an earlier o column). The daily bars in Chart 4 give show the next support level to be around 1140. There are a number of reasons for choosing that level. For one thing, it's near the 200-day moving average. For another, 1140 would be a 61.8% retracement of the upleg that started in late October as shown by the green horizontal lines. That level also represents a 50% retracement of the whole advance that started in August. Then there's the early October peak at 1942 (see box). That's important for two reasons. One is based on the chart concept that a previous peak should act as support on a downside correction. The other has to do with Elliott Waves.

Chart 4

Chart 5

WHY 1140 IS SO IMPORTANT FOR THE S&P 500 ... I've written many times about my belief that the market rally that started in August was the fifth (and final) upleg in the cyclical bull market that started in October 2002. I also pointed out, however, that even the final upwave should have five waves. Unfortunately, that five-wave sequence since August isn't that clear. Chart 4 shows three clear upwaves from the August bottom. As I've written before, the current setback could be a Wave 4 correction which would allow for another retest of the old high. There are a couple of ways to determine if the current decline is more serious. One is to see if the 62% retracement level holds at 1140. If it doesn't, then we've probably already seen the high. Another way is to watch the early October peak at 1142. In Elliott Wave work, a Wave 4 should never fall below the top of Wave 1. If it does, that would mean that the rally starting in August has ended. It would also mean that the entire cyclical bull market that started in late 2002 has ended as well. I happen to think that is the case. But a close under 1140 would confirm that a new bear market is starting.