The Weekly Charts

Trend emerging?

Commentary: Action was more muted this week as the market took on a more ranging quality. The primary indexes are within striking distance of major resistance levels, providing bulls with the hope of a Santa Clause rally, yet ultimately those levels will need to be overcome in order to fuel a rally into the end of the year. Therefore, the major indexes can be considered at an inflection point. In October the markets made a major low, followed by a higher low in November. This signifies the potential for a longer term uptrend, yet until the market(s) can climb above October highs the possibility of a ranging market or another wave to the downside remain equally likely. (For more, see Is the Santa Claus Rally For Real?)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

The S&P 500 SPDRS (NYSE:SPY) ETF representing the S&P 500 closed out the week basically flat indicating some uncertainty near the top end of the range. The October high is at $149.42, which if cleared to the upside will confirm the uptrend. The uptrend, if it is confirmed, is likely to target the high at $137.18.  On the other hand a drop below Thursday’s low at $123.65 signals short term weakness and the price could move towards the November low at $116.20. If the uptrend is in fact occurring, the price should hold above this level, providing a buying opportunity if the October highs are eventually broken or even if the market stays range bound into the end of the year. On-balance volume was showing a positive divergence at the October low, signaling the market was oversold and due for a move higher. On-balance still remains strong and in a solid uptrend indicating buying interest in this market.

The Diamonds Trust Series (NYSE:DIA) ETF representing the Dow Jones Industrial Average is very close to breaking the October highs and is likely to be the first index to confirm the uptrend. If DIA can accomplish this, and another of the major indexes confirms, it will be a very solid signal that the broader market will head towards the May highs at $128.63 over the longer-term. The October high on DIA is at $122.58. The November low is the major support level at $112.14, and it is likely that support will develop before this mark in the event of a pullback. On-balance volume is in a strong uptrend, pointing to a higher price as long as that uptrend remains intact.

The PowerShares QQQ (NYSE:QQQ) ETF representing the Nasdaq-100 has more mixed signals. It is further away from the October high than DIA and on-balance volume has been moving in a more choppy fashion.  It has cleared the 50-day and 200-day moving averages though, which currently intersect just above $56.  In the even of a pullback support should develop above $53, providing a buying opportunity with stops below the November low at $52.87.  The high on QQQ came in July, $59.83, which is the target if the index can clear resistance at $59.20 (October high). In the shorter-term a rise above $57.62, the December high, could trigger a rally into the October high at $59.20. (For more, see On-Balance Volume: The Way To Smart Money)

The iShares Russell 2000 (NYSE:IWM) ETF represents the small-capitalization Russell 2000 Index, which is more driven by the domestic economy than the global one. Therefore, with uncertainty abroad, it is curious why IWM has been harder hit than the other indexes this year. This divergence could set up for an aggressive rally if the other indexes begin to break out to the upside. If IWM can break above $76.97 it will confirm the uptrend and set up a longer term target of $86.81. In the even of a pullback or a ranging market support is at or above the November low of $66.62. On-balance volume in this index is also choppy and actually diverging with price – this indicates underlying weakness. (For more, see Technical Analysis: Introduction.)

The Bottom Line
The major indexes are all nearing resistance at the October highs, and if they can break above will provide confirmation that an uptrend is underway. The uptrend should ultimately challenge the mid-year highs, yet given a news driven volatile market, pullbacks could occur. If the major indexes can hold above the November lows, the current technical picture remains intact, while a drop below the November lows would be a major indication of weakness. The other possibility is the market trades within a range, therefore, it is prudent to wait for an upside breakout to occur before assuming this market is in uptrend. In the event of a pullback, buying if support develops above the November low is likely to be profitable whether the market does move into an uptrend or trades in a range between the November lows and November highs. Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Read, learn, discuss, and share all about trading at TradersLaboratory (TL), the leading online trading forum for day traders, swing traders, and active investors