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The Weekly Report For December 6th – December 10th, 2010

The markets surged higher this week, in effect erasing the past months pullback in just a few sessions. It was a strong display by the bulls as the markets held support after threatening to break down earlier in the week. The markets are entering a seasonably strong period and it will be interesting to see if the markets can build on this week’s strength. Investor Sentiment measures such as the AAII Investor Sentiment Survey are at high levels, warning of investor complacency.

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The S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) ETF is approaching a key level near $123 as we close out the week. SPY experienced a strong bounce from its rising 50-day moving average which cemented the $118 area as support. It’s possible that SPY will retrace back towards its rising 20-day moving average or even the unfilled gap near $119. However, SPY should remain above $118 in any healthy scenario. A move below this level should not be ignored by traders. (For more, see Technical Analysis: Introduction.)

The Powershares QQQ ETF (Nasdaq:QQQQ) also rallied back to its November highs and never seriously threatened to fall back into its prior base under $50. While not likely, this would still be the key level to watch on any weakness. QQQQ instead is bearing down on the $54 level and trader should monitor this area for a breakout. It would be interesting if QQQQ challenged the $55.07 high set during the last bull market. A move above this level would take QQQQ to levels not seen since 2001. (For more, see The Anatomy Of Trading Breakouts.)
 

Much like SPY, the Diamonds Trust, Series 1 (NYSE:DIA) ETF avoided a breakdown earlier this week. DIA slipped under its 50-day moving average for one session, before gapping higher and surging the rest of the week. DIA ended the week near its November highs and proved the $110 area as solid support. Much like SPY, it’s likely that DIA will do some backing and filling, but DIA should not approach or drop under $110. A move below this level would be very negative.

The iShares Russell 2000 Index (NYSE:IWM), which has quietly been taking a leadership role, announced it loud and clear this week by clearing its November highs. It also finished well into levels not seen since the bear market began. The $74 level had been acting as stiff resistance, and now that it has been cleared, traders should monitor this area as a likely support area on any near-term weakness. This continues to be a key index to monitor as we head into the year’s final month, as there tends to be a rotation into smallcaps near year-end. It is bullish for this group to lead the way higher as it shows that investors are willing to bet on riskier asset classes, so trader should continue to monitor this groups role as a leader.

The Bottom Line
The past several weeks have seen the markets probing for support, particularly with SPY and DIA. Now that the markets held support, traders have a very key level to monitor on the downside. With IWM leading the charge higher, it seems likely that the other indexes will follow suit. The initial thrust has been pretty sharp, so there may be some backing and filling before the next move higher. Traders should now keep a sharp eye on the support levels that held over the past few weeks, as this would be the line in the sand in case something goes wrong for the bulls. Otherwise, this rally needs to be assumed valid until proven otherwise. 

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