The Weekly Technical Charts

What do they say?

The markets closed out the week higher despite a mid week pullback. Bulls continue to buy any weakness, and what looked like the beginning of another pullback quickly vanished. The markets have been on a tear since February and have remained well above their 20 and 50-day moving averages the entire time. In fact, the market indexes have not closed under their 10-day moving averages for several weeks.  Despite the strength, there are some cracks starting to show up and traders should remain cautious moving forward. While a bearish stance would not be appropriate considering the price action over the past year, now would not be a prudent time to be chasing stocks higher.

IN PICTURES: 7 Tools Of The Trade

The Diamonds Trust, Series 1 (NYSE:DIA) ETF which tracks the Dow Jones Industrial Average is one of the averages showing some cracks in its foundation. There have been a few distribution days (selling day with higher volume than prior day) logged over the past few weeks, and notice how DIA is starting to form a rounding shape just under $110 per share. The 20-day moving average is stretched far beyond the 50-day moving average, and this type of move is typically not sustainable for long periods of time. There is also a MACD divergence appearing, with the price making new highs as the indicator is hitting lower values. While these clues are showing that the markets are losing some momentum, there really aren’t any signs that DIA has topped out yet. (For more, see What does it mean to use technical divergence in trading?)

The S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) is showing a similar pattern. SPY is well above its base, with only minimal corrections along the way. Every bout of selling is met with buyers willing to pick up more shares. SPY is showing a similar divergence to DIA on the MACD indicator, showing that momentum is slowing. The 20 and 50-day moving averages are also very stretched out, showing an overbought environment.

The Russell 2000 as represented by the iShares Russell 2000 Index (NYSE:IWM) ETF is probably the ETF with the most bullish looking chart structure. IWM was lagging the large caps for a couple of weeks, but it ended up clearing a small consolidation that formed over the past few weeks. While its bullish that IWM is resuming its leadership role, it is also showing similar divergences to the other index ETF’s. The closest level

The chart for the Powershares QQQ ETF (Nasdaq:QQQQ) looks much like DIA and SPY. It has managed to follow through nicely from its base breakout in March, and has absorbed all of the recent distribution days. It is showing the same divergences as the other ETF’s and is showing signs of slowing momentum. 


Botom Line
While the index ETF’s are showing some signs of slowing momentum, the bottom line is that they are all at new recovery highs. The largest reason for caution is that they are all stretched out from the prior bases and initiating new positions in this area would put a trader in a vulnerable position. While the markets are becoming extended and are vulnerable to a pull back, the price action continues to favor the bulls. Leading stocks also continue to act well, and there could continue to be opportunities in individual stocks even if the indexes begin to consolidate. The thing to watch for beyond the behavior of the market leaders is to continue to keep an eye on high volume distribution days. While the markets have shown an ability to absorb them recently, if institutions continue to sell into rallies it would only be a matter of time before a deeper correction set in.