The weekly charts

For what it’s worth..

Commentary: After starting the week by gapping higher and running, the markets reversed course to close at its lows. Fridays decline was particularly weak, as the markets gapped lower, reversed to fill the gap intraday, only to reverse again and close near its lows for the week. Stepping back, the weakness should not have been really surprising, as the markets had closed higher seven of eight days leading into the mid week reversal. It was an interesting situation, as the markets were becoming overbought on shorter timeframes, while still pretty oversold on longer timeframes. In the end, the markets remain trapped in a trading range between their prior bases and the August lows.

The S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) reversed well before hitting its prior base, or even its 50-day moving average near $125. At the end of the week, SPY remained near the mid point of its recent range, and near its 20-day moving average. This may be a place where SPY finds support, but until there are some signs of buying it would be a risky bet. With this week’s reversal, the new high near $123.50 has now become an important level to watch. A close back above that level would imply a retest of the prior base near $127.

The Diamonds Trust, Series 1 (NYSE:DIA) ETF also gapped lower on Friday and ended the week near its 20-day moving average. Like SPY, this area may hold as support, but traders are better off waiting to see how the markets react to this week’s reversal. DIA reversed near a prior pivot low, and couldn’t seriously attempt to break back into its prior base. This proves that sellers exist just above current levels, and now DIA will have to see at what level bulls will step in. If DIA finds support before breaching its recent lows, it very well could come back to test for a move back into its prior base.

 After climbing back into its base, the Powershares QQQ ETF (Nasdaq:QQQ) ETF reversed at its 50 and 200-day moving averages. The strength in the index was a positive for the markets, and remains worth watching as we move forward. QQQ is still outperforming its peers, and is still fairly close to its prior base. QQQ is now wedged between its 20 and 50-day moving averages, and if it finds support here, it may oscillate between the two in the near term.

The smallcaps though, as represented by the iShares Russell 2000 Index (NYSE:IWM) ETF continue to perform poorly and finished the week as the first index back under its 20-day moving average. This underperformance in concerning, as the Russell represents 2000 stocks versus the 630 stocks that SPY,QQQ and DIA represent combined. This is painting a picture of broad weakness, and should not be ignored. The $74 level is now a key level to watch as this is where the markets reversed this week. Looking lower, the $50 level remains a key area to watch, not just for IWM but also for the markets. This is because a breakdown in IWM sill likely spillover into the general markets.  

Bottom Line
As we’ve mentioned the past few reviews, even if the markets are bottoming, it will take time to repair the recent damage. The market indexes gave back a lot of ground in just a couple days this week reminding market participants that the environment remains volatile. It is still too early to know whether the markets are headed back lower or simply still in the midst of a bounce attempt. Most of the indexes are actually starting to trade in a channel as they drift higher and this price action is starting to resemble a bear flag. While some individual stocks have started to look a little better, the vast majority of stocks remain technically damaged underscoring the need to be careful. It looks like the markets are not yet ready for a sustainable move to either direction, so traders simply need to remain patient.

Charts courtesy of