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Tickers in this Article: DIA, SPY, QQQQ, IWM
The markets were able to inch to new recovery highs this week on very light pre-holiday volume. Overall, December has been a very strong month, and it wouldn't be out of line for the markets to begin digesting the recent move. Next week is the final trading week of the year, and the light volume will likely continue as many traders take some time off. Market sentiment levels are starting to push to bullish extremes often associated with a pullback. This fact, coupled with certain markets approaching key resistance levels, should have traders taking some caution into the New Year.

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The S&P500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF for instance, is approaching the area where the markets cliff-dove back in 2008. SPY topped out at 130.83 back in August, 2008 and entered the infamous freefall from there. This could be a significant area of resistance, so traders will need to be on guard as we approach the New Year. That level is still over 4% away, but should be a key level to watch moving forward. If the markets were to pullback from here, traders should watch the $122.75 and $120.25 levels as possible support areas. (For more, see Support & Resistance Basics.)




The Powershares QQQ ETF (Nasdaq:QQQQ) also inched higher this week, and continue to consolidate above the $54 level which coincides with its November high. Traders should look for buyers in this area on any weakness. QQQQ is actually showing a positive divergence from SPY in that it has already surpassed a critical level near $50.50. This was an important high from 2008, and was the area from where the sharp declines began. QQQQ is actually approaching its prior bull market highs near $55. This could be a critical level for QQQQ and traders should remain vigilant in this area.



Much like SPY, The Diamonds Trust, Series 1 (NYSE:DIA), is also close to testing a key high from 2008. For DIA, $118.73 was an important high and should have traders on guard on the chance DIA trades there soon. While the near term structure is clearly bullish, the market is due to take a breather and this approaching resistance could be a formidable adversary for bulls.



The iShares Russell 2000 Index (NYSE:IWM) ETF continues to lead the way higher. This group has been showing great relative strength, and is above an important long term resistance level near $76. IWM does have a high near $80.60, from which it reversed after a gap that could act as resistance moving forward. Traders should watch this level as IWM trades higher to see if any significant selling begins to occur. (For more, see Santa's Stock Portfolio.)




The Bottom Line
Much of what we mentioned last week remains the same. Historically the end of the year has been positive for the markets and the typical year end rally has even coined the term Santa Claus rally. The markets continue to show underlying strength and many individual stocks remain in a strong position. While the near-term picture still looks very strong, traders should be cognizant of the significant resistance levels that SPY and DIA have yet to face. If there was a single level that would bring in sellers, it would be where SPY failed in 2008 near $143.55. Traders should watch this key area as we head into the next year. With sentiment readings moving to the extreme, the likelihood of a pullback is starting to become more likely. Traders should remain cautious, especially after a strong short term move such as we've seen the past few weeks. (For more, see The Frost, Festive World Of Investing.)

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