The Weekly Charts

Crucial support levels..

The markets finally broke out of the range they had been bound to for the past three weeks and unfortunately for the bulls, the move was to the downside. The S&P 500 closed under its 50-day moving average on Thursday for the first time since August 30, 2010. While this is certainly a bearish development, the markets rebounded sharply on Friday to close back above the 50-day moving average. While a one-day move above or below this mark is not significant in the grand scheme of things, the fact that the markets are waging a battle in this area provides us enough clues about the high-risk environment we are in. Traders need to stay very cautious right now.

IN PICTURES: Top 7 Technical Analysis Tools

The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY), is clearly under pressure.This is evidenced by the trend break and high volume over the past few weeks. Notice that despite the bounce on Friday to close out the week on a high note, SPY remains under the majority of the price action that has taken place over the past few weeks. This area could provide significant resistance moving forward, so traders need to see how SPY reacts to any increase in selling as it tests the prior base from $131-$133.50. While SPY could indeed find some support here, there would likely still be much more consolidation needed before it can attempt another run at new highs.


The Diamonds Trust, Series 1 (NYSE:DIA) ETF is in a similar pattern as it remains under its recent trading range despite the rebound on Friday. Although DIA has been defending its 50-day moving average, the majority of recent buyers are still likely underwater. Traders should keep an eye on this week’s low; a move below this level could lead to a test of the pivot low near $117.50.


The Powershares QQQ ETF (Nasdaq:QQQQ), which represents the Nasdaq 100, ended the week solidly under its 50-day moving average despite the strong day on Friday. The $56 level held as support, making it an important area to monitor moving forward. The next week should be very interesting for QQQQ as it will probably face resistance near $57, coupled with the strong support just below this level. A move under $56 may lead to a test of the $54 level.


The iShares Russell 2000 Index (NYSE:IWM) ETF closed the week out somewhere in between QQQQ and SPY. IWM closed almost exactly at its 50-day moving average, but ended in a similar position, just under most of the recent price action. The $83 level proved to be very stiff resistance and IWM is now in danger of forming a top. Traders should closely monitor this week’s low; a close beneath this level may lead to a test of the $77 level.


The Bottom Line
While the markets could set a bear trap here and surge higher, the odds may be favoring more downside. Traders have been accustomed to buying every pullback, and the markets have rallied unchecked for months now. The general indexes broke under some key levels this week and unless they can rebound soon, the possibility of lower prices is likely. For traders who only trade to the long side, this may be a good time to raise cash and wait to see how the markets react. Even if the markets can find some footing here, the transition is likely to be toward more sideways trading rather than a straight shot higher. One of the keys to becoming consistent in trading is to recognize when to step aside. This may be one of those times where the day-to-day volatility is not worth the risk for short-term traders. (For more, see Technical Analysis: Introduction.) 

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!