Any chance the selling is done?
The markets started the week with a large gap higher, but it was all downhill from there. Having spent the better part of three weeks gradually climbing higher, the markets retraced more than half the move in four days. Only a modest bounce on Friday saved them from a clean sweep of negative closes through the week. Overall, the markets failed at holding their near-term breakout levels, so bulls need to be on alert right now.
IN PICTURES: 7 Tools Of The Trade
The chart for the S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, shows a sharp decline after the gap higher on Monday morning. It’s interesting that the gap occurred very close to SPY’s declining 50-day moving average. This average acted as resistance back in May as SPY attempted to recover from the “flash crash”. This average should be on traders’ radars moving forward as a possible resistance area. Looking at the chart below, the markets are approaching their recent lows again, and next week will be very important in determining the next possible direction. A clean move toward the lows will likely find buyers, but if the markets weakly consolidate just above this area it could set the stage for a break of those lows.
The Diamonds Trust Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, also failed at its declining 50-day moving average. Even worse for the bulls was its failure to attract buyers at last week’s breakout area and 200-day moving average near $102.50. This area may become resistance on a bounce moving forward, so traders should keep an eye out. While DIA closed flat on Friday, it was well off the lows that could be showing some buyers in the low $100s. This was where the majority of trading volume occurred the past few weeks and could represent an area of support.
The Nasdaq, as represented by the Powershares QQQ ETF (Nasdaq:QQQQ), was unable to manage a green day all week and also ended up below last week’s breakout area. QQQQ’s Monday gap up to its 50-day moving average encountered a plethora of sellers. One positive for QQQQ however, is that it held above its 200-day moving average, after briefly dipping below the average on Friday. The level to watch over the next two weeks is the June low. While there is support below this level, a drop below $43.59 would negate the recent pattern of higher highs and higher lows. This may imply a move to new lows overall.
After underperforming last week, the Russell 2000, as represented by the iShares Russell 2000 Index (NYSE:IWM), held support near its 200-day moving average. It actually closed up over 1.5% on Friday, although much of this might be attributed to an index rebalancing. However, on longer term charts, IWM remains in the strongest position of the major index ETFs. It’s possible that the lows set this week will hold, and may and end up forming a new support level.
The markets are at an area where traders need to show patience. Overall, most of the market indexes are right in the middle of their most recent highs and lows. The weakness shown this week was not promising at all, but there is the possibility that the markets will form a higher low in this area. This would be a positive sign, and could cement the recent area as a more important intermediate low. However, it is still too early to interpret the possibility that this will happen, and there is still the real possibility that the markets will flounder in this area for a while before breaking much lower. This is why traders need to show patience, and allow the markets to fluctuate until more clear patterns emerge. While it is tempting to try to pick the bottom of this pullback, traders are probably better served waiting for the markets to stabilize and present a better opportunity.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!