What do they say?

Commentary: The second week of the year ended much like the first. After a gap higher on Tuesday, the markets spent the rest of the time consolidating and moving sideways. While on the surface, not much really happened, there was a steady pattern of buying intraday weakness for much of the week despite a slightly overbought environment. After basically two weeks of slightly drifting higher, the markets should be close to a more substantial move. Traders should remain cautious, as many of the market indexes we follow remain in resistance areas.

The S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) ETF had some very positive developments this week. Despite trading sideways for most of the week, SPY was able to clear its October high on Tuesday and then hold above it the rest of the week. It pulled back into this area near $128 late in the week and buyers stepped in to support it. This is now a key area to watch as despite being above its October high, SPY remains vulnerable to a bull trap reversal. Any strength that carries SPY above this week’s highs would likely solidify the breakout.

 The DJ Industrial Average as represented by the Diamonds Trust, Series 1 (NYSE:DIA) ETF traded similarly to SPY with mostly sideways movement. While the week to week action was very similar, overall DIA remains in a better position. It is actually approaching a test of its 52 week highs near $128 after another solid week. The $122 level remains a key area to watch on any weakness. Any pullback into this area should attract buyers if the market is truly healthy.  

The Nasdaq 100 as represented the Powershares QQQ ETF (Nasdaq:QQQ) ETF also traded mostly sideways for the week. QQQ remains just under its all time highs and could really throw a monkey wrench in the bear’s plans with a breakout to new highs. However, it is more likely that QQQ needs some time to rest before a sustainable breakout. The $56-$57 area would be an area that should hold on market weakness, so traders should keep an eye on that area. Looking above, $59 remains the key area to watch.

The smallcaps as represented by the iShares Russell 2000 Index (NYSE:IWM) ETF is one area all traders should be focused on. IWM is perched right at its October highs and could realistically break in either direction. IWM finally cleared its 200-day moving average this week and held above it. This is a positive and IWM could use this area as a launching pad for a breakout. However, because IWM is overbought and at resistance, it is also vulnerable to a reversal. This is one reason traders should remain more cautious than usual. The markets are displaying some bullish behavior, but they are still hanging around key resistance while being overbought.  

Bottom Line
The bottom line is that the markets are still truly at a crossroads. There has been some very positive price action as many indexes have cleared some significant resistance levels and intraday price action this week was positive. Buyers have been stepping up and selling pressure has been fairly light on pullbacks. However, overall, the markets are overbought while still near critical areas of resistance. The pullbacks have been swift and severe over the past few months and it would not be shocking to see one in the coming weeks. That being said, overall the market’s price action has improved somewhat, and could be signaling a healthier intermediate trend. (For more, see Technical Analysis: Introduction)

Charts courtesy of stockcharts.com