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Tickers in this Article: DIA, SPY, QQQQ, IWM
The markets spent the week consolidating and attempting to stabilize after dropping sharply last week. While there is a possibility that the markets are attempting to put in a low here, they are still very vulnerable to a continuation move lower. All of the indexes have been drifting up in a corrective fashion, after an impulsive move lower. The technical picture remains much the same as last week, with all the indexes below declining 20 and 50-day moving averages. Next week is a holiday shortened options expiration week, so it could end up being volatile. With the markets drifting up to overhead supply, it could be a pivotal week as well.

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So far last weeks high volume hammer reversal in the S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) ETF has held as an important low. While the action hasn't exactly been bullish, instead looking more like a corrective move higher, it is the first step in an attempt to halt the recent decline. Stepping back, the markets broke under a rising trendline and have been correcting that move. This action didn't technically signal a top, merely an end to the short term uptrend. The markets are basically trading sideways at this point, and at some point will either resume moving higher or complete a topping pattern and enter a more serious correction. The bottom of the hammer remains a key level to watch on a pullback.

The Diamonds Trust, Series 1 (NYSE:DIA) ETF show a very similar pattern. Despite the positive action this week, DIA hasn't been able to even reach its declining 20-day moving average. The breakdown from the past few weeks has left some overhead supply and it will be interesting to see how the markets respond as DIA pushes back up to the $103 level. Last weeks low remains the key level to watch underneath.

The iShares Russell 2000 Index (NYSE:IWM) ETF performed better than its large cap peers this week, as it was able to rally up to its declining 20-day moving average and was able to negate the huge red candle from February 4th. It is approaching a key level of resistance near $62, which corresponds with its 50-day moving average and a lateral line of resistance marking two prior peaks. How it reacts to this level will have important implications for the rest of the markets.

The Powershares QQQ ETF (Nasdaq:QQQQ) finished the week similar to IWM in that it negated the huge red February 4th candle. Leadership will likely need to come from this group if the markets are to resume heading higher. While the price action this week was positive, it is still has some room before it even reaches a possible resistance area near $45. It will not bode well for bulls if sellers rush in on higher volume as it approaches this area. (For more, check out A Closer Look At The Market Leaders)

Bottom Line
It seems market sentiment has improved a bit this week, as the markets stabilized and held last weeks lows. However, this is not a time for traders to get too comfortable buying the recent dip. The markets remain vulnerable, and the price action has remained corrective in nature. It takes a few shakeouts before a market can truly end a decline, and thus it would be wise to expect a retest of the recent lows in the coming week or two. How the markets react to these pullbacks will offer many clues as to the next direction. In the near term, the markets are range bound between their recent hammer lows, and resistance lines overhead near their 50-day moving averages. A move beyond either of these levels may take some time to develop. Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing Joey Fundora did not own shares in any of the companies mentioned in this article.

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