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Tickers in this Article: DIA, SPY, IWM, QQQQ
The markets continued to consolidate over this short holiday trading week. There was some volatility this week with several gaps in both directions, although the most important development was a clear show of support near last week's lows. This was a positive especially when coupled with a complete lack of participation from the financials and escalating tensions with South and North Korea. Now that the lower range has been tested a couple of times, traders have a clear level to watch in the case of more weakness.

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The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, was the clear laggard this week, as it was hampered by the financial sector. Despite lagging its peers, SPY did manage to find support near $118 and has now settled into a range between $118 and $120. This is positive as it takes time to have a healthy consolidation. Traders should monitor these two levels as a move in either direction could easily gain momentum.


Source: StockCharts.com


The Powershares QQQ ETF (Nasdaq:QQQQ) fared a little better than SPY, but in effect it is also still in a consolidation. QQQQ created some space from last week's bounce near $50-$51 and this is the clear level to watch if the markets pull back some more. On the upside, last month's high near $54 is the area in focus.

Source: StockCharts.com

Much like SPY, the Diamonds Trust, Series 1 (NYSE:DIA) ETF has started to form a narrow range, trading between $110 and $112. The past two months have shown clear support on pullbacks to $110. Its 50-day moving average is now rising above this level and could offer another level of support. This would be the key area to focus on, with $112 being the area to watch on strength. A move above this level would likely lead to a retest of recent highs near $114.

Source: StockCharts.com

The iShares Russell 2000 Index (NYSE:IWM) has quietly been taking a leadership role, and it is much more apparent after this week. IWM closed well above its low for the week and beyond this, this week's low failed to come close to those of last week, leaving this index looking much stronger than its peers. IWM is not too far from last month's highs near $74, which is a significant level for IWM. A move above this area is likely to lead to a strong breakout. This continues to be a key index to monitor 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.


Source: StockCharts.com


The Bottom Line
Last week we mentioned how the lows formed during the week would be critical to monitor, and this week ushered in a successful test of these lows. Because these lows have been tested again, they now take on an increased importance for traders. If these levels fail in the near future, it would mean two groups of buyers would be under water, which could spur even more selling. The markets needed to pause, but the question remains of whether more consolidation is in order or if the markets are ready to make a choice. While the odds likely still favor a continuation move higher, traders need to monitor the levels being shown for confirmation. (For more, see Technical Analysis: Introduction.)

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