What do these charts say (if anything..)?
Commentary: The general indexes spent the majority of the week in a tight consolidation before a disappointing employment report sparked some selling pressure. While the markets began backing away from an established resistance area formed by their June highs, by the end of the day on Friday the markets had recouped a large portion of their one-day declines. This was an impressive display put on by the bulls. The general indexes remain above their 20-, 50-, and 200-day moving averages with multiple levels of support beneath them. They closed out the week well above last week’s close.
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The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, encountered selling as it approached $113 this week, and this is now the level that needs to be watched on the upside. $113 halted the June bounce as well and bears are likely keying on that level as a near-term line in the sand. If SPY can consolidate and rally through this level it could cause some short covering and help provide fuel for a breakout. Looking below, SPY pulled back into this Monday’s gap higher, which acted as support on the first attempt. While the key levels to watch are much lower, SPY could also find support near last Friday’s low of $109 if weakness sets in next week. Ultimately, SPY remains in a large trading range with clearly defined levels on both sides.
The Diamonds Trust, Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, is presenting an interesting dilemma. While SPY remains below important resistance, DIA was able to clear resistance earlier this week, which resulted in a higher high. If DIA can find support near the breakout area, this would confirm the breakout and likely lead to a test of the April highs. Traders need to keep an eye on last week’s low, as a drop below this area could result in a failed breakout.
It’s interesting that while the Nasdaq, as represented by the Powershares QQQ ETF (Nasdaq:QQQQ), failed to reach its June high, it was able to clear a down trendline that was marking the past few pivot highs. The June high is still the most important level to watch on the upside, as clearing it would set a higher high, but clearing the down trendline was a step in the right direction. Much like the other indexes, last week’s low, and then $44 below that, remain the key levels to watch.
The Russell 2000, as represented by the iShares Russell 2000 Index (NYSE:IWM), is showing some relative weakness. It is the only index that failed to clear last week’s highs and was the first to test last week’s low. IWM is an important ETF to watch as it represents 2000 small cap stocks whose health is critical to a sustainable rally. The $64 level is an area for traders to watch, as a break below this area could cause weakness to spill over into the other indexes. The $67 area has contained the past few rally attempts and would be the key level to watch on the upside.
The bulls have been showing resiliency over the past few weeks, as most selling pressure has been quickly absorbed. What could have snowballed into a reversal this week ended up being just another day of consolidation. The longer the markets consolidate just under resistance, the more likely it becomes that they will eventually break out. The key levels to watch on the upside are clearly defined and traders need to be patient and let the markets prove themselves. If the indexes can set the higher high in the coming days, it would effectively end the correction that began in April. We mentioned a few weeks ago that traders need to be open-minded about a possible bottom being formed, and the recent action can only be labeled as bullish. While the markets could fail in this area, the odds are slowly shifting toward the bulls.
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