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The Weekly Charts

November 14th, 2011 · No Comments

What do they tell?

Commentary: You wouldn’t know it by looking at the day-to-day movement in the indexes, but the stock market basically continued to consolidate this week. Tuesday saw a large gap down with Italy now in the spotlight, followed by persistent selling all day that threatened to derail the recent rally. However, the markets started to recover on Thursday and then gapped and ran higher on Friday to close out the week on a positive note. In the end, nothing more than consolidation occurred, and the indexes remain between their recent highs and lows as they move sideways.

The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, actually ended the week in the green as it made a run at its 200-day moving average on Friday afternoon. SPY held above the lows set last week as it pulled back to test the prior breakout. This is showing some strength, as buyers stepped in ahead of those lows. Overall the consolidation is starting to narrow in range as SPY moves sideways. It may take a little more time before SPY emerges from this consolidation, but the move should be a strong one based on how it is consolidating. Any strength that carries SPY above $129 could lead to new yearly highs, while a break down below $122.50 would introduce the idea of a bull trap.

The Diamonds Trust, Series 1 (NYSE:DIA) ETF is showing some relative strength to SPY in that it held support at its 200-day moving average after briefly dipping under the level early in the week. DIA has now successfully defended the $116-$118 area on two separate occasions and this is the key level to focus on moving forward. DIA may continue to compress in the coming days, but the pattern looks healthier than SPY, so it will be interesting to see if it leads its peer. (For more, see What Is Relative Strength?)

The Nasdaq 100, as represented the Powershares QQQ ETF (Nasdaq:QQQ) ETF, also spent the week defending its 200-day moving average. Despite the recent volatility, QQQ has not really been in danger of falling under this recent consolidation, and buyers have been aggressively defending the $56 level. The $59 level remains the key area to watch, and a breakout above this level would lead to multi-year highs.

While the small caps, as represented by the iShares Russell 2000 Index (NYSE:IWM) ETF, have remained under their 200-day moving average since August, the recent consolidation closely resembles its peers. IWM is starting to compress into a triangle-type pattern as it consolidates while remaining above prior resistance. While its not guaranteed, triangles are typically continuation patterns so the likelihood is for further upside follow resolution of the pattern. 

The Bottom Line
In the end, another week went by with the markets aggressively buying a dip. While the volatility certainly seemed extreme early in the week, it is worth noting that it was actually of a smaller magnitude than the three day move at the end of October. In essence, the market is consolidating, and it may continue to do so next week. This may mean a boring week is ahead of us if the pattern of compressing prices continues. However, at some point soon, the market will emerge from this trading range, and the move may be stronger than usual. While it may be lower, the recent trading action is leading me to believe it will be higher. Many individual stocks are looking much better than just a few months ago as market participants continue to get more aggressive. The markets continue to be news driven in the near term, but every new crisis has been getting absorbed as market participant’s price in the new information. If this pattern continues, it could lead to a strong market through the end of the year. (For more, see Analyzing Chart Patterns: Introduction.)

Charts courtesy of

Tags: Technical Analysis