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Weekly Technical Analysis

January 18th, 2010 · No Comments

Correction looming?

Commentary: The markets gave back most of their 2010 gains in one fell swoop to close out the week. There have been recent fears that the markets would correct with the onset of earnings season, and with Intel Corp. (Nasdaq:INTC) and Alcoa Inc. (NYSE:AA) both closing negatively after their reports, that fear may be substantiated. Next week will bring a plethora of reports, despite the shorter holiday schedule. The markets are quickly pulling into support levels, and next week’s earnings reports will likely be the catalyst that pushes the markets into deeper corrections or resumes the rally.

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Despite the weakness in the S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, the ETF is still above its recent base and above its rising 20-day moving average. There are a few possible scenarios traders should prepare for in the coming days. Near term, there is a possibility of SPY finding support at its rising 20-day moving average, but another important level to watch is the prior breakout area near $111.50 and the 50-day moving average. If the markets do follow through on weakness, this would be the area to watch for signs of possible support. A move back into the prior base would be a bearish development, and probable cause for taking a defensive posture in most traders’ portfolios. (For more, see Guard Your Portfolio With Defensive Stocks.)


While the decline in The Diamonds Trust, Series 1 (NYSE:DIA) ETF is similar to SPY in that it is regressing to its rising 20-day moving average, DIA is in a much more precarious position. DIA is already close to its breakout zone, and in danger of falling back into its prior base. The 50-day moving average aligns with some lateral support and is a possible area for buyers to step in, but if it fell into the prior base then the failed breakout would definitely be considered a bearish development.


The small caps, as represented by the iShares Russell 2000 Index (NYSE:IWM) ETF, also had a negative week, but ended up holding well above the prior base and 20-day moving average. There are a few levels to watch in IWM moving forward, but the more important thing to watch is the relative performance of IWM with its larger cap peers. IWM will lead markets in a healthy environment and, as such, it is important to track how it’s performing versus the more conservative index ETF likes DIA or SPY.


The Powershares QQQ ETF (Nasdaq:QQQQ) may have had the weakest performance for the week, undercutting even some late December price action. However, even with the weak performance, QQQQ remains in possibly the best position of strength when compared to the other market ETFs. QQQQ remains well above its prior base, and it managed to close right near its 20-day moving average. QQQQ is another ETF to watch for relative performance with its peers, especially due to its recent leadership role. If QQQQ begins to lag, then it could be a negative sign for the markets as well. The high $44s remain the important area to watch, as bulls would prefer to have QQQQ remain above its prior base.


Bottom Line
Stepping back, the weak performance for the markets as we kick off earnings season is definitely a cause of concern for the bulls. A reversal after breaking to new highs could put in a long-term top and, as such, bulls should be cautious. However, technically speaking, the markets remain above their bases and rising moving averages. Despite some red flags, the benefit of the doubt remains with the bulls until further deterioration occurs in the charts. The recent lows that coincide with prior consolidation areas are the level to watch for now. If the market ETFs begin to fall back into their bases, then bulls would be wise to take a more cautious approach.

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Tags: Technical Analysis