What do those charts say??

Commentary: The markets rebounded this week, which was a bit of a surprise, having ended last week on a sour note. It was a little surprising because despite the strength of the recent rally, last week’s pullback was steep and on increasing volume. The markets have virtually erased all of last week’s declines and are once again at a critical juncture. With resistance firmly established above, the markets may have a tough time resuming the uptrend next week without a major catalyst. Interestingly enough, earnings season should be in full swing, with several high-profile companies on the docket. Some of the companies on tap for the coming week include Johnson & Johnson (NYSE:JNJ), Intel Corp. (Nasdaq:INTC), JP Morgan Chase and Company (NYSE:JPM), Goldman Sachs Group (NYSE:GS), Google, Inc. (Nasdaq:GOOG) and International Business Machines Corp. (NYSE:IBM). How these companies report will have a huge impact on the near-term market direction. Throw in the fact that next week is options expiration and the markets could be in for a spike in volatility.

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In looking at the chart for the S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, it’s interesting to note that despite the strength this week, the markets were unable to clear the September highs. This level is a key area to watch moving forward, as is the low established last week. The markets remain in a trading range until either of these levels is taken out.

Source: StockCharts.com

The Diamonds Trust Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, is showing one very important difference. DIA was actually able to close at new recovery highs, although it remains below the high set in September. While closing levels typically hold more weight than highs or lows, DIA accomplished this on really light volume and this ETF is less a representation of the general markets, as it only tracks 30 companies. As such, while this move may be a sign of strength, it should be taken in the appropriate context.

Source: StockCharts.com

The iShares Russell 2000 Index (NYSE:IWM) ETF, on the other hand, tracks 2,000 companies. IWM stopped well short of its September highs on this week’s rally and volume was much lighter than last week. Much like the other ETFs, IWM is showing a clear divergence on the MACD indicator. This divergence is not a trading signal, but provides a clear warning that the current rally is on waning momentum. The $62 level is a critical area for this ETF and could rebuff a rally attempt.

Source: StockCharts.com

The Powershares QQQ ETF (Nasdaq:QQQQ) ended the week much like SPY did, closing very close to the September highs. With several high-profile tech names reporting earnings next week, the next move will surely depend on the reaction to the reports. The $43 area remains key overhead resistance, with the $41 area appearing to have held as support. This zone clearly defines the current trading range, and a move to either direction could provide a good trading opportunity.

Source: StockCharts.com

Bottom Line
As mentioned last week, the sharp decline was not necessarily the beginning of a deep correction, but more likely a transition to a period of range-bound price movement. With last week’s lows firmly behind us, it appears that the markets have established an area of near-term support and near-term resistance. It’s quite possible that we will remain in this range in the near future. As traders, we must remain patient and let the markets show us which way they intend to move next.