Reading the tea-leaves…   

Commentary: Technically speaking, the financial markets seem to have put in a fresh low and look vulnerable to a continuation move lower. As you can see from the charts below, the technical picture remains much the same as last week, with all the indexes having a difficult time overcoming the resistance of their respective 20 and 50-day moving averages. The bulls have a lot of work ahead of them if they’d like to send indexes to new 52-week highs.

IN PICTURES: 7 Tools Of The Trade

So far last weeks high volume hammer reversal in the S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) ETF has held as an important low. While the action hasn’t exactly been bullish, instead looking more like a corrective move higher, it is the first step in an attempt to halt the recent decline. Stepping back, the markets broke under a rising trendline and have been correcting that move. This action didn’t technically signal a top, merely an end to the short term uptrend. The markets are basically trading sideways at this point, and at some point will either resume moving higher or complete a topping pattern and enter a more serious correction. The bottom of the hammer remains a key level to watch on a pullback.

The Diamonds Trust, Series 1 (NYSE:DIA) ETF is the weakest looking indexes this week as it seems to be struggling with its nearby 50-day moving average. Friday’s doji candles could be used to suggest that the resistance is stronger than some traders are anticipating and the selling pressure could be setting up to continue for another week. As mentioned above, the breakdown from the past few weeks has left some overhead supply and it will be interesting to see how the markets respond as DIA trys to get back above the 50 DMA. The recent swing low near $99 remains the key level to watch underneath.

The iShares Russell 2000 Index (NYSE:IWM) ETF performed better than its large cap peers for the second consecutive week, as it was able to remain above its 50-day moving average. It is approaching a key level of resistance near $63.50, which corresponds with last week’s high. How it reacts to this level will have important implications for the rest of the markets.

The Powershares QQQ ETF (Nasdaq:QQQQ) finished the week similar to IWM in that it was able to remain above its 50-day moving average. Leadership will likely need to come from this group if the markets are to resume heading higher. While the price action this week was positive, it is still has some room before it even reaches a possible resistance area near $47. It will not bode well for bulls if sellers rush in on higher volume as it approaches this area. (For more, check out A Closer Look At The Market Leaders)

Bottom Line
It seems market sentiment has improved a bit this week, as the markets stabilized and held above the recent low. However, this is not a time for traders to get too comfortable buying the recent dip. The markets remain vulnerable, and the price action has remained corrective in nature. It takes a few shakeouts before a market can truly end a decline, and thus it would be wise to expect a retest of the recent lows in the coming week or two. How the markets react to these pullbacks will offer many clues as to the next direction. Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!