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Weekly technical update

September 21st, 2009 · No Comments

Quite a rally, what do the charts say? Any more from where that came from?

Commentary: The general markets continued to rally to new recovery highs this week, extending their move above the August highs. There is no question at this point on the breakout, and the markets are in the process of setting a higher pivot high. While it can be argued that the current rally is a product of overshooting to the downside during last years decline, or attributed to the decline in the dollar, the bottom line is that the markets have had a substantial move from the March lows. Traders second guessing this move have either missed out or been run over.

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The S&P500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF has gained over 55% from the March lows, and continues to look very healthy on short and intermediate term timeframes. While the current move is starting to get extended, there is no real pattern developing that shows weakness. It’s possible that SPY will pullback to last week’s breakout area just under $104, which also coincides with its rising 20-day moving average. The key levels to watch remain the September low, and now this weeks high.

The Diamonds Trust, Series 1 (NYSE:DIA) ETF which tracks the Dow Jones Industrial Average is also starting to get extended. Note how far it is extended from its rising 20-day moving average. Typically stocks in an uptrend will have an impulsive move away from their 20-day moving average, and then consolidate on a pullback to the average. Often buyers are waiting at these levels in an effort to get more value.

The iShares Russell 2000 Index (NYSE:IWM) ETF has outperformed it larger cap peers, with a rally in excess of 80% from the March lows. IWM is also looking healthy, although there are some divergences appearing in the charts. Notice how the MACD histogram is not making a new high even as price does. While this warns at waning momentum, it must be confirmed by price action. Even though it appears likely that IWM will begin a pullback soon, at this junction, it would take a move below the September low to put the current trend in question.

The Powershares QQQ ETF (Nasdaq:QQQQ) has also outperformed since the March lows, rallying over 60%. The underlying tech stocks continue to outperform and QQQ is the direct beneficiary. QQQQ is clearly above the August high, and is in the process of setting a new high. This is a perfect example of what an uptrend looks like; higher highs, followed by higher lows.

Bottom Line
While the markets have rallied sharply and are susceptible to some digestion, the recent highs are a bullish development and there are very few reasons to be short this market from a technical perspective. The September lows are the key levels to watch, and to a lesser extent, how the markets react on the next pullback to their rising moving averages. A failure at these levels would hint at a deeper pullback to test the September lows.   Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Tags: Technical Analysis