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The Weekly Charts

June 12th, 2011 · No Comments

Last week was the sixth consecutive week down, any light at the end of the tunnel?

Commentary: It was more of the same for the markets as stocks suffered through another week of selling. The majority of the week was spent moving lower, with any attempts at strength being quickly rebuffed. Thursday saw a gap higher, and by the end of the day sellers had pushed the markets off their highs. Friday was met with a push to new lows, and despite a mid day surge, they ended at their lows for the day and week. The markets are already quite oversold and the chances for a rebound are fairly high. That being said, the markets did close solidly in the red for the week and all of the indexes have undercut important lows. At this point, traders need to realize, that regardless of whether the markets show some strength next week, it is likely that they will need much more time before a sustainable rally can occur. The recent declines have certainly left some resistance overhead from market participants underwater on trades.

The S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) has pushed back towards the lows set back in March, and easily undercut its April lows. The decline has come in a straight line, certainly trapping many bottom pickers along the way. Because there are likely many trapped traders, it is probable that the markets will have significant resistance on any bounces. This is what makes bottom fishing so difficult. While the markets will likely retrace much of their declines, the move will likely not be smooth and will encounter bouts of selling. The likely area for resistance in the immediate future would be near the April lows around $130. Any bounce into this area will likely bring in sellers. Looking below, SPY may be headed for a trip to its 200-day moving average which coincide with the March lows.

The Diamonds Trust, Series 1 (NYSE:DIA) ETF is still well above its March lows, but did manage to break under its April lows. DIA struggled with the $122 level after breaking down earlier in the week, and this is a key level to watch moving forward. If the market weakness continues, DIA could eventually also test its 200-day moving average, as well as the March lows near $115.

The Powershares QQQ ETF (Nasdaq:QQQ) ETF had a tough week as well, also undercutting its April lows as well. QQQ is pretty close to already testing its March lows, and any signs of relative strength last week have been erased. The inverse head and shoulders pattern that had developed earlier this year has been negated now that QQQ broke back under the right shoulder. The March lows will obviously be critical if the markets continue to show weakness moving forward..

The iShares Russell 2000 Index (NYSE:IWM) ETF has reversed and is testing the bottom of its prior base. IWM has been very weak, but is also approaching what should be a solid level of support. is in a similar position to QQQ. The $77 area has held as support on several occasions since clearing it in December, 2010. The 200-day moving average is also rising to this area and IWM may catch a bid if it pulls back into this level. If it slices through it, it could be a long summer for small cap investors.

Whereas the markets had been showing some conflicting signals a few weeks ago, the picture has become much clearer recently. The markets have suffered considerable technical damage, and the uptrend on the daily chart is effectively broken at this point. This doesn’t mean the markets are in a downtrend, as in fact, there is still an uptrend on the weekly charts, but the trend on the daily chart is currently sideways at best. This is due to the markets setting lower lows after breaching their April lows. Despite the chances of an oversold bounce being fairly high at this point, most traders should continue to tread lightly. This is a very dangerous environment, and the markets can always get more oversold. Remain patient and focus on risk control rather than trying to recapture recent losses. The market will eventually stabilize and present better opportunities.

Charts courtesy of stockcharts.com

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