The markets started out the week with a sharp two-day rally that caught a lot of traders off guard. Many traders, including myself, were expecting the markets to pause after Friday's weak close, but instead they easily cleared last week's highs en route to new recovery highs. The markets did log in another distribution day this week, which would make two in the past two weeks. A distribution day is a negative day that occurs on higher volume than the preceding day. This is typically a sign of institutional selling pressure. A few distribution days is typically nothing to worry about as it represents some profit taking, but if the markets continue to see distribution days then it would serve as a warning of institutions backing away from rising prices.
The first distribution day last Friday ended up taking the Diamonds Trust Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, down to its breakout level near $107. DIA responded to this test of support with a sharp bounce, which is a positive for bulls. This solidifies the $107 area as support and will be a key level to watch moving forward. Despite a second distribution day this week, DIA remains above last week's high and has been basically drifting sideways for a few days now. There are still some signs of the markets starting to get ahead of themselves, but nothing has occurred yet that signals any type of reversal.

Source: StockCharts.com

The S&P500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, also tested its February breakout area near $115. Buyers rushed in pretty quickly though, leading to new highs for SPY as well. SPY closed out the week trading sideways, and the end result is that SPY ended up fairly close to where it started the week despite finishing green for the week. The $115 area remains an important level to watch for support.

Source: StockCharts.com

The Russell 2000, as represented by the iShares Russell 2000 Index (NYSE:IWM) ETF, also had a strong rebound after last week's distribution day. IWM gapped under last week's low on Monday, but reversed to wipe out much of what was lost on the distribution day. It then followed the other indexes in recovering to new highs. It continues to lag its large-cap peers in the near term, as the pullback in the second half of the week has taken IWM back into Monday's trading range. However, on longer time frames IWM remains a leader, holding well above its February breakout level. The strong rebound from the high $66 level offers another support level to watch moving forward with primary support looming at $65 from the prior breakout.

Source: StockCharts.com

The Powershares QQQ ETF (Nasdaq:QQQQ) also recovered nicely from the recent distribution days as Apple Inc. (Nasdaq:AAPL) led the tech index higher. Apple remains the market leader for this group and it managed to trade to new all-time highs this week. It's difficult to expect the worst when this group's leader is trading at all-time highs and acting very well. QQQQ remains in a steady uptrend with the $46.50 area offering a level to watch for support. The low $47s will also be an area to watch, as this is where buyers rushed in on Monday.

Source: StockCharts.com

Bottom Line
While the markets could use a breather, the bottom line is that the bears have been unable to string along more than a day or two of selling over the past several weeks. The action in leading stocks remains strong and until this behavior changes, bears should remain extremely cautious. It would still not be a surprise to see the markets take a rest break here, and ultimately they may have started doing this already with Thursday's distribution day. It's not necessarily a negative if the markets do show some weakness, as consolidation is healthy and an exchange of shares between market participants is needed to provide fuel for a sustained move. If we start seeing continued high volume distribution days, then it would tell us a more cautious approach is needed.

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

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