More selling?

Commentary: After bouncing higher last week, the financial markets reversed and had one of its worst weeks in years. Volatility exploded and stocks were sent back toward their recent lows. 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 almost 5%. We have mentioned the possibility of a continued bounce higher, and unfortunately for bulls, that doesn’t seem to be the case quite yet. These scenarios often play out as forced selling due to margin calls compounds several times over.

As mentioned earlier, the S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) ended the week down nearly 5%. Many traders were eyeing the move back toward the neckline of a head and shoulder top as an area to jump back into their short positions. 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 the resistance of its nearby 200-day moving average and a prior pivot low. This level was too strong for the bulls and as a result we’ve seen a move back toward the recently lows.

The Powershares QQQ ETF (Nasdaq:QQQ) ETF closed the week down nearly 7%. The move toward the recentl lows is troubling for the bulls and unfortnuately the technical picture isn’t providing many signals of relief any time soon. Of course, traders will have to wait until next week to see if there is any follow through, but at this point most are just hoping that the index doesn’t break below the low of $49.93.

The iShares Russell 2000 Index (NYSE:IWM) ETF. The ETF closed down by 6.5% for the week. 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 18% 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. 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. Charts courtesy of stockcharts.com