Tickers in this Article: DIA, SPY, IWM, QQQQ
The markets closed out the month with impressive gains, rallying from a failed breakdown in early July. All of the indexes ended the month at new recovery highs, eclipsing the highs set in June. It seems several participants have been caught off guard with the ferocity of the move higher, but these moves are typical when one side of a trade gets caught with its proverbial "hand in the cookie jar". In this case, it was the bears that thought there was easy money to be had when the indexes appeared to break down from head-and-shoulders topping patterns. The end result was a failed breakdown that led to a bear trap. Traders that shorted into the breakdown had to scramble to cover as the surprise rally also brought in fresh bulls. The markets have rallied in a straight line higher for several days and are starting to get frothy.

The Diamonds Trust, Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, has risen almost every day for the past three weeks. There have been a few strong up days, and no down days of note. DIA rested for four sessions beginning last Friday before gapping higher on Thursday. This gap may be an exhaustion gap, as it occurred well into the rally and DIA ended the session near the lows while forming a shooting star candle pattern. This is typically a bearish pattern that foreshadows upcoming weakness. However, there was no follow-through to either side in a lackluster Friday. There are conflicting signals on the chart, such as DIA having two weak closes to end the month, yet not filling the bullish gap from Thursday. With the markets showing indecision despite being overbought, it's possible that they will be stuck in a trading range until the move is digested. (Make more educated trading decisions by identifying major turning points Pivot Strategies: A Handy Tool.)

Source: StockCharts.com

The chart for the S&P 500 SPDRS (NYSE:SPY) ETF also shows a straight-line advance for practically the entire month of July. Even the sharp rally off the March lows wasn't as persistent as the current leg up. While the price action has certainly been bullish, the SPY is showing some signs of exhaustion. The shooting star candle printed on Thursday, followed by a doji Friday, warns of a near-term high; it's very difficult for markets to sustain a breakout through resistance without some sort of consolidation. If SPY is indeed ready to take a breather, the $95 area is a logical support level that doubled as prior resistance.

Source: StockCharts.com

The iShares Russell 2000 Index (NYSE:IWM) ETF looks practically identical to the SPY chart. The one minor difference is that some of the down days are a little more pronounced, but that's to be expected as the Russell 2000 index is more volatile in nature. Much like SPY, the prior breakout area, or rising 20- and 50-day moving averages, should act as support levels on a pullback. (Learn more in the Moving Average Tutorial.)

Source: StockCharts.com

The Powershares QQQ ETF (Nasdaq:QQQQ) rallied over 14% from the July low to high, and also had an impressive three-week run. However, much like the other index ETFs, QQQQ is showing signs that the rally is getting long in the tooth. If a pullback does materialize, look for the Qs to find support at the prior breakout area and the rising 20-day moving average.

Source: StockCharts.com

With the indexes overbought, it makes sense to prepare for some consolidation. If the markets are to follow through to higher levels, then they need to take a breather and digest some of the recent rally. While some are calling for a top to form, the current price action is very bullish and it makes no sense to fight the tape as long as the markets remain above rising short- and intermediate-term moving averages.

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