What do those charts tell us?
The markets once again spent the week frustrating the bears. The weakness that began a couple of weeks ago has been completely negated, as the general indexes rallied to new recovery highs. This marks two attempts at a pullback in the last month that have been met with staunch support by the bulls. The materials and energy sectors were among the week’s winners, as the U.S. dollar broke to new lows. Stocks such as Schlumberger Limited (NYSE:SLB) and Silver Wheaton Corp. (NYSE:SLW) finished the week with nice gains on the heels of the drop in the dollar. With the markets back to new highs, the best the bears can do is regroup and wait for another shot.
The chart for the S&P 500 SPDRS (NYSE:SPY) ETF reveals how the markets were able to shake off the recent weakness with several consecutive days of advancing prices. The markets stair stepped their way higher and were able to clear the highs they set in August. This move was a fairly sharp reversal, so it would not be a surprise to see some backing and filling action that would take SPY toward its rising 20-day moving average. The new low set in early September is now an important level to watch, as a move below this would signal a failed breakout.
The Diamonds Trust Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, is showing a much weaker pattern. While the bounce from the pullback low has been impressive, DIA failed to clear the highs it set in August. While this may simply be a case of the large caps lagging the general markets, it is a show of weakness. DIA will be range-bound until it can clear its August highs with some conviction.
The iShares Russell 2000 Index (NYSE:IWM) ETF was able to clear the August high and held above this level despite a lackluster Friday session. Much like SPY, IWM has rallied in a pretty sharp manner, and could be vulnerable to a pullback from this level. A healthy scenario would be a pullback to the rising 20-day moving average on falling volume. Much like the others, the September low should be watched as an important level, which if broken could signify a breakout failure. (For related reading, check out Trading Failed Breaks.)
The Powershares QQQ ETF (Nasdaq:QQQQ) appears to have resumed its role as a market leader. QQQQ was the first to clear the August high and has maintained its breakout the best. Leadership from the tech stocks is a bullish sign, as it shows investors are willing to take on additional risk in their chase for returns. While QQQQ could digest some of these gains, it would take a drop below the $39 level to threaten the current pattern.
While the markets have rallied sharply and are susceptible to some digestion as we head into options expiration week, the recent highs are a bullish development and there are very few reasons to be short this market from a technical perspective. Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!
At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.