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Tickers in this Article: DIA, SPY, QQQQ, IWM
After spending the first two days of this week continuing the recent pullback, the markets managed to rebound and retrace most of their losses. In the end, they closed out the week at just about the same place where they began. This was a positive development, as the markets were able to flush out excess bullishness while also respecting technical support levels. Overall, stocks need to pull back in order to have sustainable trends, and while we may still have more consolidation ahead of us, the recent pullback has been effective in curbing bullish sentiment readings in indicators like the AAII Investor Sentiment Survey. While some market indexes dropped further than others, they all found support near important levels.

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For example, the S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, found support near a recent consolidation area. SPY spent most of the past month trading in the $118-$120 level and while it sliced through its 20-day moving average, the larger range was able to halt its decline. This week's low near $118 is now an important level to monitor, as SPY will likely need more time to consolidate the recent pullback.


Source: StockCharts.com


The Powershares QQQ ETF (Nasdaq:QQQQ) also slipped under its 20-day moving average, although it did respect its prior breakout area near $50-$51 after its recent weakness. This was an important level to hold as it confirmed the top of the prior base as support. After a sharp drop, the resulting bounce often stalls out before reaching new highs, so it is quite possible that QQQQ will come back for a retest of this area. Traders need to be cautious and continue to monitor this level. (For more, see Support And Resistance Reversals.)

Source: StockCharts.com

The Diamonds Trust Series 1 (NYSE:DIA) ETF followed a similar pattern to QQQQ as it retraced toward its breakout area. Earlier this week, it appeared that DIA would fall under critical support near $110, but buyers did manage to step in and help DIA bounce higher. While it is likely that DIA will need more time to consolidate, holding the $110 level was a positive development. This would be the key level to monitor in the near future in case the markets resume their weakness.

Source: StockCharts.com

The iShares Russell 2000 Index (NYSE:IWM) also slipped under its 20-day moving average this week, but managed to find support near a prior consolidation. IWM has been showing some strength over the past couple of weeks, and it was able to close out the week on a high note. It is now firmly back above its 20-day moving average, making this week's low the critical level to monitor in the near future. This is also a key index to monitor overall, especially as we head into the year's final month. This is typically a strong period for small caps and the recent strength may be hinting at a rotation back into this group. (For more, see The Anatomy Of Trading Breakouts.)


Source: StockCharts.com


Bottom Line
The lows formed earlier this week are now where traders should be focused. It would be unlikely for the markets to simply rally from this point to new highs as it often takes more time to consolidate both the preceding rally and the recent weakness. The likeliest scenario would be for a range-bound environment between the October highs and this week's lows as the markets digest some of the recent volatility. However, this is simply one scenario, and traders need to be on guard for a move in either direction. The benefit of a week like this is that we now have clear boundaries to monitor. With next week being a holiday week, traders can expect low volume and possibly more sideways action. This is likely to line up well with the idea of further consolidation between the recent highs and lows.

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