The Weekly Technical Charts

What do they say?

The Weekly Report For January 10th – January 14th, 2011

The markets kicked off the New Year with higher prices although they were accompanied with an increase in volatility. Monday brought a strong gap higher that lifted many stocks, but the rest of the week was peppered with false moves in both directions. Beyond that, each of the different market indexes took different directions as the small caps were hit with some profit taking while tech stocks finished higher. In the end, the markets did finish higher across the board despite the increased volatility.

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The S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) ETF led the charge earlier in the week on the heels of a strong move in the financials. However, the financials then came under pressure on Friday and were one of the weakest sectors of the day. There was an increase in volatility as witnessed by the long lower shadows on several candles this week revealing wide intraday moves. The $126 level was tested a few times and would be the first level to watch for near term traders. A drop below this level could signify more consolidation ahead. However, the important level to watch remains just above $130. This was an important pivot high in 2008 and the breakdown from this level precipitated the worst part of the recent bear market. (For more, seeCandlestick Charting: What Is It?)

While the Powershares QQQ ETF (Nasdaq:QQQQ) which represents the Nasdaq 100 also experienced some volatility, it did manage to surge to new several year highs. In fact, QQQQ has actually cleared the highest level from the last bull market. This is an impressive leadingdivergence from the rest of the indexes and could be revealing tech stocks as the new leader moving forward. The $55 level which had been acting as a ceiling through December before being cleared this week held on a few pullbacks. This would be the first level to watch along with $54 below it for support on a pullback.

Much like SPY, The Diamonds Trust, Series 1 (NYSE:DIA) is also close to testing a key high from 2008. For DIA, $118.73 was an important high and should have traders on guard on the chance DIA trades there soon. DIA continued to press higher although it too showed an increase in volatility. DIA did defend its gap this week and should have some support near $115. The key though will be if it can muster up the strength to power through $119.

The iShares Russell 2000 Index (NYSE:IWM) ETF showed the most weakness this weak. It has been leading the charge higher along with QQQQ, so perhaps some profit taking was in order. However, traders should also be on guard for a possible rotation away from riskier stocks to safer stocks. The selling in IWM came on increased volume so traders should be cautious in the near future. Buyers stepped in to defend the $78 level so this would be the first level to watch. Looking above, a move above $80 could signal a resumption of the uptrend.

Bottom Line
It’s been commonly held that the markets usually finish the year in the same direction as the first week of trading. Despite the volatility, the markets did close out the week higher and the benefit of the doubt remains with the bulls. The Nasdaq 100 is at almost 10 year highs and above its prior bull market highs which is really quite surprising considering the extent of the recent bear market. However, traders need to be cautious as the markets are becoming overheated as the S&P 500 approaches a key level. Despite the trend remaining higher, the market is becoming increasingly susceptible to a correction. It will likely be swift when it does occur, so traders should remain cautious moving forward. (For more, see Support & Resistance Basics) Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Have a Great Day!

By Joey Fundora