The Weekly Charts

Interesting juncture…

Commentary: The stock markets finally gave back some gains this week as the furious rally that began in late June ran into selling. As we head into Friday, the stock market had retraced approximately half of the past two week’s worth of price advancement. While volume has ticked up a little, it is not alarmingly high, especially due to the ferocity of the recent bounce. The markets basically shot straight higher off the June lows, with some market indexes actually able to hit new highs. Some sort of pullback had to be expected, and the big question now is whether the current weakness is a pause before a breakout, or continued topping action that will lead to lower prices.  

TUTORIAL: The Greatest Market Crashes

When taken in context, the S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) continues to trade in a broad sideways range. It tagged the bottom of the base in June, and rallied to almost the top as it stalled out near $136. SPY is now right about in the middle of the base, and is testing its 20 and 50-day moving average as support. This could be a critical area for SPY, as the markets try to figure out whether it is pausing for a push higher, or grinding out a top. If SPY continues down towards the bottom of the base, it could set the stage for a breakdown under the $125 level. (For more, see Use Pivot Points For Predictions.)

The Diamonds Trust, Series 1 (NYSE:DIA) ETF has held above its 20 and 50-day moving averages and a support level near $123. However, the general action is about the same. DIA stopped just short of the top of its current base, and has been correcting some of the recent move. Bulls would like to see a pause near $123 that attracts buyers. In general, DIA has been setting higher lows (i.e. March and June) which is a positive sign. However, the recent rally failed to set a higher high, and puts the uptrend in danger. (For related reading, see 2 Indexes That Help Assess Market Behavior.)

Interestingly enough, the Powershares QQQ ETF (Nasdaq:QQQ) ETF were able to hit new highs last week. Typically this would be an important clue, as tech would be leading the way. However, QQQ dropped rather quickly after tagging the highs. QQQ is testing its 50-day moving average much like the other indexes, and how it behaves will be another important clue for the markets., Inc. (Nasdaq:GOOG) reports after hours on Thursday, and that may be an important catalyst for QQQ as we close out the week. (For more on Google, see Is Google Getting Weaker?)

The iShares Russell 2000 Index (NYSE:IWM) ETF has also declined quite sharply this week, although it also remains above its 20 and 50-day moving averages. The top of the range has been a wide area between $84.50 and $86, while the bottom of the range is clearly near $77. Overall, it is trading in a large lateral range, much like the other indexes and how it behaves near the middle of the range will likely have important implications for the next few weeks.

With the markets starting to become a little oversold, the next few days may be key as to the near term trend. If the markets can find some footing here near the middle of the broad ranges, it could set the stage for an eventual breakout. However, it is still possible that the markets continue pulling back towards the bottom of the existing range. There are plenty of mixed signals pointing towards both outcomes and traders will simply need to remain patient here. Several key sectors have shown strength, such as the Transports and Consumer Discretionary groups which point towards continued strength. However, there are enough signs of selling warning bulls to remain cautious. With earnings season gearing up, there will definitely be some day to day swings. Traders simply need to remain cautious and wait for a clearer picture to emerge. (For additional reading, also check out The Anatomy Of Trading Breakouts.)

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