The Weekly Charts

Any respite in selling?

Commentary: It was a bad week for market bulls as the indexes ended up near their lows by Friday afternoon. After an initial bounce on Monday, the markets attempted to rally back to their recent trading ranges. However, after briefly climbing above their 20-day moving averages, selling accelerated in the indexes and the market began a slide that lasted the rest of the week. While all the indexes we follow remain above their recent lows, the price action this week was certainly indicative of a weak market.

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The S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) rallied back into the channel it has recently been following before reversing near the $120 level. This was just above its 20-day moving average and almost within reach of its 50-day moving average. However, SPY never seriously challenged its most recent highs near $122.50 before heading lower. Price action in SPY remains consistent with a weak environment and it would not be surprising to see SPY retest its lows near the $110 level. (For more, see Moving Averages: Introduction.)

The Diamonds Trust, Series 1 (NYSE:DIA) ETF is trading in a very similar pattern to the SPY this week, although it did show some relative strength. While DIA reversed after climbing back into its recent trading channel, it did hold up well above Monday’s low unlike the other indexes. Because the Dow only represents 30 stocks, this strength can easily be attributed to the performance of a few individual names like International Business Machines (NYSE:IBM). Traders should continue to watch the $106 level in the near term when specifically looking at DIA, but the other indexes are more relevant when assessing the overall markets.

The Powershares QQQ ETF (Nasdaq:QQQ) ETF, which has been showing relative strength for weeks, finally caved in to selling pressure. In fact, it can be argued that QQQ performed even weaker than its peers by closing under last weeks lows. QQQ has now joined its peers in falling out of its recent trading channel. This market will not be able to sustain any strength without participation from this group. With Apple, Inc. (Nasdaq:AAPL) slated to make an announcement next week, it may help dictate what the next direction is for QQQ.

In a recurring theme, the small caps, as represented by the iShares Russell 2000 Index (NYSE:IWM) ETF, continued to perform poorly. After a volatile week, IWM ended near not only its lows for the week, but also its 52-week lows. IWM appears destined for new lows, so next week will provide a critical test for the index. While a shakeout under recent lows can’t be ruled out, traders need to be prepared for a full fledged breakdown at this point.

Bottom Line

The market indexes once again finished the week in a very precarious position. By closing at their lows for the week, the markets are setting the stage for continued weakness in the coming days. All bounce attempts have to be considered as shorting opportunities until the markets can prove otherwise. Maybe the markets can once again hold support near their recent lows, but the pattern of continued lower highs has not been very promising for bulls. The coming week should provide more clues to traders, but the market has not been shy about revealing its intent. Sellers remain in control and as such traders need to remain cautious. (For more, see Technical Analysis: Introduction.)

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