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Tickers in this Article: DIA, SPY, QQQQ, IWM
The markets staged an impressive rally the past few days after threatening to continue their recent slide earlier in the week. The general indexes were looking vulnerable by late Tuesday as they headed for a retest of last week's lows, but a sharp gap higher on Wednesday caught bears flat footed and ended up leading to a three-day surge. The markets ended the week sharply higher and cemented the recent lows as support. They remain in a trading range, and could be on their way for a retest of the July highs.

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The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, respected the $104 level as support, making this a critical level to watch. The significance of this level is that it held above the July lows, showing that investors were willing to pay higher prices than they were a couple of months ago. This could be an important higher intermediate low, and would be confirmed with a break above resistance near the $113 level. Despite the show of strength by the bulls, SPY likely still needs time before mounting a serious assault to clear the $113 level. The markets are already extended in the near term, and are pressing into gap resistance near $112.

Source: StockCharts.com


The Diamonds Trust, Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, also respected a support level earlier this week and ended up surging from those lows. The $100 level has become a clear level to watch, as bulls have aggressively defended this area on a few occasions. Looking above, DIA is testing an important level near $105, which is the lower end of a bearish gap from August that acted as stiff resistance a couple of weeks ago. A close above this level could lead to a test of the more important level of $107.

Source: StockCharts.com


The Powershares QQQ ETF (Nasdaq:QQQQ) was in serious danger earlier this week as it started to drop from the $44 level, but the Qs came roaring back by the end of the week and closed above their 200-day moving average. As the stock pierces the $44 level, the new lows near $43 should be the focus on any weakness in the coming days. The sharp rebound from this level may have trapped some bears and it should act as support moving forward. If QQQQ breaks beneath this level, it may result in a full-fledged test of the low $40s as support.

Source: StockCharts.com


We mentioned last week that the Russell 2000, as represented by the iShares Russell 2000 Index (NYSE:IWM), had been showing some relative strength and that it could be a valuable clue as to the next move in the markets. One of the potential catalysts for the strong move this week was an increase in jobs in the private sector and this could be hinting at an improving picture for the small cap sector. The small caps remain a key component to watch and the $59 level is the clear area to watch on the downside. Overall, IWM remains in a much larger trading range, and it could take some time before it is ready to clear either side.

Source: StockCharts.com


Bottom Line
This week's price action was very constructive as it showed aggressive buying near support levels. While this doesn't guarantee a bottom is in, it is the first step in a possible bottoming process. The markets have quickly gotten ahead of themselves, and while they may ride the current momentum a little higher, the more likely scenario is a retracement of at least a portion of this week's rally. The markets are still within a much broader trading range, and it is still too early to know if this is a larger topping process or if a new base is being formed. The levels to watch are pretty clear with this week's bounce clearly showing where support is, and the July highs marking resistance. With summer practically over, the next few weeks should usher in an increase in volume and provide more clues as to the next move in the markets. Either way, it is sure looking like there could be a strong move in autumn.

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