The Weekly Charts


Commentary: After gapping higher on news of a debt ceiling deal, the stock market promptly reversed and had one of its worst weeks in years. Volatility exploded and stocks were decimated. Selling was widespread and the number of stocks that were able to weather the storm was almost non existent. For the week, the S&P 500 ended down over 7%. We mentioned the possibility of a flush out last week, and unfortunately for bulls, that is what transpired. These scenarios often play out as forced selling due to margin calls compounds several times over. Stocks are severely oversold already, and the markets did at least finish off their lows for the week.

As mentioned earlier, the S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) ended the week down over 7%. Many traders were eyeing the possible head and shoulder top that had been developing, and SPY easily completed the pattern on Tuesday. What was a shock, though, is that SPY actually hit the target for this pattern only three days later. Volume expanded on the latter part of the week in what may have been capitulatory selling. It’s tough to have any confidence in Friday’s lows holding for more than a few days though with the ferocity of the recent selling. Even if the markets did capitulate, the bottoming process usually takes time as buyers and sellers battle it out. The two key levels to watch will be Fridays low and the $126-$127 area that was marking the bottom of the head and shoulders. SPY could fall into a new range within these boundaries.

The Diamonds Trust, Series 1 (NYSE:DIA) ETF also came undone this week as it sliced through multiple levels of support. Last week we mentioned that DIA was likely on its way to test $119 near its 200-day moving average and a prior pivot low. This level was breached and then a couple of days later the March lows near $114 were taken out. Despite the Friday bounce that closed DIA in the green, the index remains below most important levels of support.

If there was any semblance of strength, it was found in Powershares QQQ ETF (Nasdaq:QQQ) ETF. Not that QQQ was able withstand the selling; in fact it also closed down over 7%. What QQQ did accomplish, though, was a close that was still within its current base. The $53.50 level held after a sharp breach on Friday and may have marked an important reversal area. Of course, traders will have to wait until next week to see if there is any follow through, but that was a small sliver of hope offered to bulls on an otherwise brutal week.

However, whatever rays of hope may have been granted by QQQ, may have been counter balanced by the horrendous price action in the iShares Russell 2000 Index (NYSE:IWM) ETF. The ETF closed down over 10% for the week, and this after a furious almost 3% intraday move off its lows. IWM is well below its base and has clearly formed a topping pattern. While there is a good chance IWM can bounce from this deeply oversold level, it will take a lot of work for it to even bounce back to the bottom of its prior base. That level stands at $77 and is still almost 8% away.

The Bottom Line
It was actually an interesting week from a technical perspective when you take it all in. As is common during capitulation selling, the markets remained oversold and simply ignored indicators pointing out the fact. In the case of the S&P 500, the target for the breakdown was actually hit, which when combined with the Nasdaq 100 holding support is a small positive development. However, the simple truth is that three of the four index ETF’s we follow are now revealing an intermediate top. While the odds continue to favor a near-term bounce, it will undoubtedly be used by many market participants as a selling opportunity. Traders and investors with long term horizons may find some stocks at attractive prices, but it remains a treacherous environment, and most traders should be on the sidelines. It will take some time to repair the damage from this week and patient traders can avoid being chopped up while the markets try to stabilize.

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By Joey Fundora