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Commentary: The markets staged a decent rally in this holiday shortened options expiration week, even overcoming a surprise move by the Fed as they raised the discount rate by a quarter of a point. While a bounce from oversold levels was expected, it was a little surprising that the markets were able to clear some near term resistance levels without too much effort. Volume has been light, but overall the price action has been constructive. 
 
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The decreasing volume is quite apparent in looking at the S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) ETF. Despite the lackluster volume, it was a sign of strength for SPY to close above small congestion range near $110 and above its 50-day moving average. However, the markets have rallied into an area that could bring in sellers, so traders should be cautious over the next week or two. The markets remain in a range bound environment, framed by the January highs and the hammer reversal that followed a month later.

The Diamonds Trust, Series 1 (NYSE:DIA) ETF show a very similar pattern. It was able to close two consecutive days over its 50-day moving average, but could be in need of some consolidation. The bounce from the hammer has traveled a decent way fairly quickly. It would be an unlikely scenario for DIA to continue blasting higher without taking a rest. Much like with SPY, traders need to be cautious in this area, as the markets are in an area where excess supply could lead to a pullback.

The iShares Russell 2000 Index (NYSE:IWM) ETF continued to perform well, as it easily cleared its 50-day moving average and surged much higher. The fact that speculators are flocking to riskier asset classes is healthy for the markets, and could be a clue that the markets may have unresolved business on the upside. The break of resistance near $62 was important, and this would be a level to watch as the markets begin to consolidate. If IWM can hold this level in a sideways range, then it could lead to a surge higher.

The Powershares QQQ ETF (Nasdaq:QQQQ) was also able to clear some lateral resistance, although not quite as convincingly as with IWM. QQQQ showed some indecision after closing with a doji right near the 50-day moving average. While a doji is not independently a bearish candle, it can be a subtle clue that the trend is changing when it comes after a sustained move. QQQQ is in a tricky spot as it has rallied sharply into a larger resistance area just as its starting to become oversold.
  

Bottom Line
Overall, the markets have continued to act constructively off the pullback lows from a couple of weeks ago. There are several individual stocks acting well, however, caution is certainly warranted at this point. While it’s quite possible that the February lows will hold as an intermediate low, the short term move is becoming a little extended and thus vulnerable to a pullback. The markets could be see some selling pressure as they push higher, as bulls that held through the correction may get nervous as the markets approach the recent highs. Overall, the markets remain in a trading range, and there are multiple scenarios that could equally apply to the next move. With most of the indexes sitting right smack dab in the middle of this range, it probably makes sense to be even more cautious than usual. The upcoming week should provide more clues as the indexes deal with the opposing forces on both sides of this range. Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!