The Weekly Charts

Quite a battlefield, but what do they say?

Commentary: After one of the worst weeks in years, the bulls were finally able to halt the extreme selling pressure. Volatility remains high and as we mentioned in our last report, traders should continue to be cautious before entering a position. For the week, the S&P 500 ended down slightly, but was well above its lows. Most of the weak hands have probably been forced out of their positions due to margin calls, which could send prices moderately higher over the short term. Many blue chip names continue to be severely oversold, which suggests that now could be a good buying opportunity for those able to withstand the risk.

As mentioned earlier, the S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) ended the week down slightly. Many traders were eyeing the possible head and shoulder top that had been developing, and SPY easily completed the pattern. The upward correction toward the neckline could be viewed as another possible entry for short sellers and it could be used by some traders to suggest that volatility will continue to be high. Luckily for the bulls, volume lightened up last week, which suggests that the fear is slowly subsiding and that the recent swing low may hold for a while.


The Diamonds Trust, Series 1
(NYSE:DIA) ETF also bounced off its lows to close the week down 1.2%, which was much better than what the price action from Monday or Tuesday was suggesting. Despite the Thursday and Friday bounce, the index remains below most important 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 continues to be the level of interest for the bulls because it will be the next level of major resistance.


As you can see from the chart of the Powershares QQQ ETF (Nasdaq:QQQ), the bears were able to send the index below its established base. The bulls sent the index back toward the $53.50 level after a sharp breach and this level will continue to be one of the key areas of interest. Of course, traders will have to wait until next week to see if the bulls can send the index back into its previous range.


The bounce was the most appreciated by the bulls that trade the iShares Russell 2000 Index (NYSE:IWM) ETF. The ETF closed down over 10% the week of August 5. Though it finished this week down 2% things were looking much worse earlier in the week. IWM is well below its base and has clearly formed a topping pattern. While there is a good chance IWM can continue its 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 approximately 10% 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 recently 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 ETFs we follow are now revealing an intermediate top. While the odds continue to favor a continued 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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