Volatile market…

Commentary: It was another volatile week as the markets experienced several large overnight gaps in both directions. While the overall price action heading into the end of the holiday shortened week was extremely choppy, the weak close on Friday left the general indexes with steep losses for the week. While the general indexes remain well above their May lows, the price action, especially on Friday may have some bulls worried.

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The S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) ETF declined well over 3% on Friday to close out the week near its lows. SPY had been battling to reclaim its 200-day moving average all week, alternately closing above and below it, until falling apart on Friday. Despite the weak close, there remains strong support below and traders should keep an eye on the May lows moving forward. There have been several strong reactions near the $105 level on SPY, and this would be the level that if broken could really accelerate the decline.

The Diamonds Trust, Series 1 (NYSE:DIA) ETF which tracks the Dow Jones Industrial Average reacted similarly to SPY as it struggled to reclaim its 200-day moving average. Much like SPY, DIA has a strong level of support underneath, and traders should monitor the $98 level. A break below this area would likely trigger many stop loss orders and possibly lead to a flush out. While volume had been trending down through the week, the decline on Friday occurred on an increase in volume which could be construed as a negative for the markets, as it shows some urgency on the part of sellers.

The Nasdaq as represented by the Powershares QQQ ETF (Nasdaq:QQQQ) continued to fare better than SPY and DIA as it managed to remain above its 200-day moving average. The $45 level has been an important level and throughout the past few months and that’s very close to where QQQQ closed for the week. This would be the first level to watch, but QQQQ also has a few possible support levels underneath this level. Last weeks lows are important, as well as the February lows that can be considered the last “defense” for bulls.

The Russell 2000 as represented by the iShares Russell 2000 Index (NYSE:IWM) actually never dropped below its 200-day moving average, and remains the strongest of the market ETF’s. While the day to day movements are much more pronounced for this ETF, the longer term trend appears to be in better shape when compared to the other market index ETF’s. Last weeks low would be the level to watch in the near term with the $58-$59 level being the primary level to watch.

Bottom Line
While some investors may have been cautiously optimistic with the markets closing higher last week, this week seems to have ushered in a new sense of urgency on the part of sellers. Most of the general indexes finished sharply lower on Friday and were down for the week. One positive is that despite the increase in selling volume on Friday, volume was actually lower for the week, and it’s possible that the markets are still attempting to stabilize after the past few week’s worth of declines. There are clear levels underneath the markets were buyers have recently stepped in, so these levels should be watched in the event the markets continue to weaken next week. The environment continues to be dangerous for traders, and caution is certainly warranted. Despite some fairly sharp bounces higher over the past two weeks, the major market ETF’s have been unable to even reclaim their 20-day moving averages. It will take some time for the markets to stabilize and begin to form a solid foundation and until then, traders should either trade on shorter timeframes, or simply stand aside and wait for better opportunities. Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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