The Weekly Charts

What do they say?

Commentary: The Dow 12,000 party was quite short lived as the index rolled over on Friday after briefly touching the milestone this week. While the consensus was that the unrest in Egypt was the culprit, this area was clearly a level of resistance for the index. After spending the entire week attempting to erase the losses from last week, many of the other indexes promptly gave back everything and closed near their lows for the week. We mentioned the occurrence of a distribution day last week, and this Friday marked another distribution day. A distribution day is a negative day that occurs on higher volume than the preceding day. The markets continue to flash warning signals and we may be entering a period of consolidation or even a correction.

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Below is a chart of the Diamonds Trust, Series 1 (NYSE:DIA) ETF showing the clear reversal from the $120 area. This is the level that coincides with much hyped Dow 12,000 level. While technically speaking, DIA remains above this rising 20-day moving average, this distribution day occurred on the highest volume recorded in the ETF in several months. $120 will certainly be the key level to watch moving forward for a breakout attempt. There are various possible levels of support to watch on further weakness but the main one to watch would be near $114.50.

The Powershares QQQ ETF (Nasdaq:QQQQ) which represents the Nasdaq 100 clearly warned market participants with its under performance last week and this week things only got worse. QQQQ did find support near its rising 20-day moving average earlier in the week and managed to bounce back near its recent highs. However, sellers flooded the ETF on Friday and set it back nearly its lows for the year. QQQQ is close to putting in a double top and traders should watch for a close below $55.50 as possible confirmation of the pattern. A break below this pattern would likely lead to a test of the $54 level. (For more, see Analyzing Chart Patterns: Introduction.)

The S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) also gave back the entire week’s gains in one fell swoop on Friday. It is currently sitting on support near $127.50 but it looks like this level will give way soon. I will mention again that the level we have been mentioning as a possible roadblock is the $130 level which was an important pivot high in 2008. The breakdown from this level precipitated the worst part of the bear market. SPY had a very clear reversal this week from this area and traders should remain cautious until this reaction sorts itself out.

The iShares Russell 2000 Index (NYSE:IWM) ETF has a meager bounce attempt earlier in the week as it failed to approach its prior highs. This was a subtle warning that the relative underperformance of this sector was still present. Of course, IWM also fell apart on Friday dropping over 2.4% on just the one day. IWM does have some support just under $77 and should be watched for a possible shakeout just under this level. However, there are signs pointing to a breach of this area such as the likely lower high just formed near $80 combined with the high volume reversal and clear relative weakness with its peers. The level to watch on further weakness would be near $74. This was an important resistance level that tracked back to 2008 and should act as a support level on a pullback.

The Bottom Line
If traders didn’t heed the recent warning signs they should be on high alert now. The markets reversed once again from important long-term resistance levels, particularly on DIA and SPY. These reversals occurred on high volume and did inflict some technical damage to index charts. Three of the four major indexes are now under their 20-day moving averages and the candle patterns formed are not pretty to say the least. Much like last week, it is still too early to know if this is simply a few days of selling or the beginning of a deeper correction. However, this is the second distribution day in as many weeks, and traders need to be very cautious here until the markets settle down and prove buyers still remain in control. The longer-term charts are still looking good, and a minor correction or consolidation is actually quite healthy. Traders should not be in a rush to pick the bottom as it is often a frustrating and fruitless effort. Once the markets stabilize and they will likely present us with clear support levels to base our decisions on. Until then we may be better off hitting the slopes or catching a movie. (For more, see Technical Analysis: Introduction.) 

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By Joey Fundora

Joey Fundora is an independent trader located in South Florida. Joey focuses on using technical analysis techniques to uncover supply and demand imbalances in equities. To see more of his work, visit his site on Stock Chart Analysis.

At the time of writing Joey Fundora did not own shares in any of the companies mentioned in this article.