Commentary: The markets bolted out of the gate on Monday this week as stocks cleared last week’s very tight trading range in an impressive move higher. However, they then began a three-day slide back into last week’s range after the Fed hinted at more easing in a statement on Tuesday. The move was starting to look ominous for the bulls until a sharp gap higher on Friday sparked a rally to new highs for most of the market indexes. While the intraweek volatility threatened to derail the recent breakout, in the end, support levels held and the markets pushed higher. This small pullback has now created an important level to watch in the immediate future.
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In the case of the S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, this week’s pullback occurred at a very important level. The $113 level was acting as stiff resistance prior to this week’s breakout, and should have turned to support once it had been cleared. But despite a one-day drop under this level on Thursday, SPY was quickly pushed higher and respected this area as support. The low that was formed near $112 on this week’s pullback should now be watched. Any drop under this level could mean a breakout failure. The next level of resistance on the upside is the highs set in May, followed ultimately by this year’s highs just above $122.
The Diamonds Trust, Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, also experienced a pullback to test support near this week’s breakout area. At this point, an objective view of DIA would have to state that it cleared a resistance level, set a higher high and then held the breakout area on its first test. This implies that the breakout is valid and ultimately, only a break under this week’s low will negate that notion.
Tech stocks, as represented by the Powershares QQQ ETF (Nasdaq:QQQQ), continued to assert their leadership role this week as QQQQ powered through resistance levels just under $49 and then continued higher by the end of the week. The vertical trend in QQQQ over the past few weeks has been surprising and is becoming extended. This week’s low is an area to watch, but the $47 level is also an area that should usher in buyers on weakness. Looking higher, the $50 level is within reach; a break above it would surely make things interesting.
While tech stocks are leading, the small caps, as represented by the iShares Russell 2000 Index (NYSE:IWM), continue to lag. IWM remains under its July highs, and also failed to rally past Monday’s highs after this week’s pullback. However, the picture is completely bearish as IWM survived an important test of the 200-day moving average this week and appears poised to clear its base soon. All eyes will be on the $67.50 level next week; a move above this level could kick the current rally into another gear.
It typically takes a few days for the markets to digest the Fed Statement and despite the initial weakness, it looks like the markets are poised for further upside. The test of the breakout level was an important one technically, and has now created an important level to key off of in the near term. The possibility exists that IWM will fail another test of resistance and bring the markets down with it, but at least there is a clear level to watch for short-term traders. Any close below this week’s lows would certainly be worth noting, as this level should hold if this breakout is valid. In the end though, this week’s price action was very positive as the markets held above their breakout levels. As long as these levels hold, the bulls deserve the benefit of the doubt.
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