What do they say?
Commentary: The markets threw us a curveball after last week’s nasty close. Rather than following through to the downside and pressuring the bulls, the markets basically stair-stepped their way higher to squeeze some bears. The resolve of this market has been remarkable, as the riots on the streets of Egypt were basically ignored by price action. While the markets have been flashing some warning signs that it is tired, traders must respect the price action as it is showing an underlying bid in this market.
IN PICTURES: 7 Tools Of The Trade
Below is a chart of the Diamonds Trust, Series 1 (NYSE:DIA) ETF showing a perfectly rising 20-day moving average. DIA has pulled back to this average on a couple of occasions and quickly rebounded higher. DIA was able to close over the much-hyped $120 level which coincides with the 12,000 level on the parent DJ-30 Index. Now that DIA has been able to close above this important psychological level, it should act as support. If DIA begins to consolidate from this level, it could pull back again, in which case last week’s low just under $118 would be an area to watch. At this point traders need to respect the price action and simply work to manage their risk due to the overbought environment.
One of the reasons that many were leery of an extension of the current rally was the recent underperformance in the Powershares QQQ ETF (Nasdaq:QQQQ) which represents the Nasdaq 100. This index broke down quicker and harder than the others, and as the residing market leader, this behavior was noteworthy. QQQQ was able to stave off a breakdown and held critical support near $55.50. This would be the level to monitor on any weakness moving forward. Traders should note that QQQQ is still technically showing relative weakness by not matching the new highs in SPY and DIA. I would still recommend caution, until this group resumes its leadership role. (For more, see Support And Resistance Basics.)
The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY), surely caught bears off guard this week as well. The nasty down bar from last Friday sure looked like a death blow, but amazingly the markets wiped out the damage in just two days. This action shows exactly why traders need to remain open minded and adjust to price action. SPY is back to new recovery highs, and bears betting on this market heading lower are caught in a trap once again. Last week’s low near the $127.50 level is now the clear spot to watch on the downside.
The other index that is still lagging along with QQQQ is the iShares Russell 2000 Index (NYSE:IWM) ETF. It bounced, along with the markets this week, but remains under its recent highs. It held support near $77, and now has a clear floor underneath. Traders should keep an eye its recent highs to see if it can join the other indexes, or if it will reverse and drag everyone else down with it. This is a key index to watch, and all bets are off for the bears if IWM can rally to new highs from here.
The Bottom Line
This week clearly shows why it is so important for traders to remain open minded and flexible. There have been many signs hinting at the markets being tired and ready for a correction, but every dip continues to get bought. In fact, there are still plenty of signs revealing investor complacency, and other clues, such as market leaders selling off after earnings, hinting at market weakness. However, only price pays, and ultimately the majority of the indexes are at new recovery highs. Until some important support levels are broken, traders must simply make sure they don’t get too complacent with their risk assessment and simply follow the trend. There are still enough signs to warrant caution, but this week’s show of support at least has given us a clear line in the sand to watch.
Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!