The Weekly Charts

Interesting rally..

Commentary: The markets managed to push higher for the second consecutive week, which caught many bears flat footed and ended up leading to a three-day surge. The markets ended the week near their respective 200-day moving averages, which will likely act as strong areas of support/resistance and could have a major influence on the market direction over the next several weeks. As you can see from the charts below, the indexes remain in a trading range, and seem to be on their way for a retest of the July highs.

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The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, respected the $104 level as support, making this a critical level to watch. The significance of this level is that it held above the July lows, showing that investors were willing to pay higher prices than they were a couple of months ago. This could be an important intermediate low, and would be confirmed with a break above resistance near the $113 level. Many bullish traders will now turn their attention to the nearby 200-day moving average because this could act as a strong area of resistance and reveal some cracks in the recent rally. Despite the show of strength by the bulls, SPY may still need time before mounting a serious assault to clear the $113 level. The markets are already extended in the near term, and are pressing into gap resistance near $112.


The Diamonds Trust, Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, also respected a support level earlier this week and ended up surging from those lows. The $100 level has become a clear level to watch, as bulls have aggressively defended it on a few occasions. Looking above, DIA is testing an important level near $105, which is the lower end of a bearish gap. The close above the nearby 200-day moving average suggests that the rally could last much longer than some are anticipating and reduces the probability of a double dip. Friday’s close above this level could lead to a test of the more important level of $107.


The Powershares QQQ ETF (Nasdaq:QQQQ) pushed higher and remained above its 200-day moving average for the second consecutive week. Many traders will now set their sights on the August high of $47.19. The sharp rebound over the past few weeks may have trapped some bears and it should add to the upward pressure moving forward. If QQQQ breaks above the high, it could lead to a longer term trend higher.


We mentioned last week that the Russell 2000, as represented by the iShares Russell 2000 Index (NYSE:IWM), had been showing some relative strength and that it could be a valuable clue as to the next move in the markets. One of the potential catalysts for the strong move this week was an increase in jobs in the private sector and this could be hinting at an improving picture for the small cap sector. The small caps remain a key component to watch and the $59 level is the clear area to watch on the downside. Overall, IWM remains in a much larger trading range, and it could take some time before it is ready to clear either side.  


Bottom Line
This week’s price action was very constructive as the indexes neared their respective 200-day moving averages. While this doesn’t guarantee a bottom is in, it is the first step in a possible bottoming process. The markets have quickly gotten ahead of themselves, and while they may ride the current momentum a little higher, the more likely scenario is a retracement of at least a portion of this week’s rally. With summer practically over, the next few weeks should usher in an increase in volume and provide more clues as to the next move in the markets. Either way, it’s looking like there could be a strong move in autumn. 

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