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Tickers in this Article: DIA, IWM, SPY, QQQQ
The markets continued to inch higher for most of this options expiration week until a Friday reversal ended up paring most of the week's gains. While the drop on Friday wasn't terribly steep, the prior gains on the week were also modest, resulting in a just a small gain or loss for most of the indexes on the week. The markets had shown an amazing resiliency, rattling off several higher closes over the past few weeks but had begun to show signs of being overbought. They finally succumbed to some selling pressure and this may be the beginning of a new consolidation. Despite the weak close, there were some positives. Many individual stocks continue to act well, and the Dow was finally able to follow in the other indexes' tracks and set new recovery highs. IN PICTURES: 7 Tools Of The Trade

While it took the Dow more time than the others, it did join the other indexes at new recovery highs and managed to stay above the breakout point into the close. The Diamonds Trust, Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, actually outperformed most of its peers on the week, showing a minor rotation to the safety of large cap blue chips. This shows at least a small preference for safety and hints at market participants seeking safety versus the search for gains. This is the first time we have seen this action in weeks, so it may be a subtle clue that the markets are in need of a breather.

Source: StockCharts.com


However, the technical picture remains one of strength in the riskier asset classes like the Russell 2000. The chart of the iShares Russell 2000 Index (NYSE:IWM) ETF reveals a clear breakout above a base with possibly the beginning of a pullback to consolidate these gains. Price action remains healthy, although the volume on the weak days is a little alarming. This week's price high will now be an important level to watch moving forward. Looking below, there are a couple of spots that could provide support on a deeper pullback. The 20-day moving average is one area near $66 that may bring in buyers and the breakout level near $65 is another.

Source: StockCharts.com


The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, is showing a little weaker action, as it is already testing the prior breakout level. This was a likely pattern based on the fact that the markets were already overbought when they attempted a breakout. The first level of support would be this area near $115, but it's possible that SPY will dip back into the base on a pullback. In this case, the next level to watch will be the 20-day moving average near $114.

Source: StockCharts.com


The Powershares QQQ ETF (Nasdaq:QQQQ) ended the week somewhere in between the small caps and large caps. QQQQ has managed to stay well above its prior breakout area near $46.60 and while the price action on Friday leaves much to be desired, it didn't occur on a drastic rise in volume. The breakout area will be the key level to watch on continued weakness, as the 20-day moving average should rise to this level by the time a hypothetical test occurs.

Source: StockCharts.com


Bottom Line
Last week, we mentioned that the markets were clearly overbought and that traders should be cautious moving forward. It appears that the markets may finally be taking a break. Consolidation is healthy and if the markets are to continue with sustained strength higher, then a rest break is needed. It is too early to tell what the next move is, as one weak day that held above support doesn't really change anything. However, there are subtle signs that the markets may be taking a breather, such as the rotation to large caps and the higher volume on the selling days. Overall, the markets are still showing strength and much will depend on the price action in the coming days. The preferred pattern for continued strength would be for volume to begin dwindling as the markets begin to drift sideways. This would allow for things to cool off while maintaining technical strength. If we start seeing continued high volume distribution days, take this as a sign that a more cautious approach is needed.

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

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