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Tickers in this Article: DIA, SPY, QQQQ, IWM
The markets kicked off the New Year with higher prices, although they were accompanied with an increase in volatility. Monday brought a strong gap higher that lifted many stocks, but the rest of the week was peppered with false moves in both directions. Beyond that, each of the different market indexes took different directions as the small caps were hit with some profit-taking while tech stocks finished higher. In the end, the markets did finish higher across the board despite the increased volatility.

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The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, led the charge earlier in the week on the heels of a strong move in the financials. However, the financials then came under pressure on Friday and were one of the weakest sectors of the day. There was an increase in volatility as witnessed by the long lower shadows on several candles this week, which revealed wide intraday moves. The $126 level was tested a few times, making it the first level to watch for near-term traders. A drop below this level could signify more consolidation ahead. However, the key level to watch remains just above $130. This was an important pivot high in 2008 and the breakdown from this level precipitated the worst part of the recent bear market. (For more, see Candlestick Charting: What Is It?)


Source: StockCharts.com


While the Powershares QQQ ETF (Nasdaq:QQQQ), which represents the Nasdaq 100, also experienced some volatility, it did manage to surge to new several-year highs. In fact, QQQQ has actually cleared the highest level from the last bull market. This is an impressive leading divergence from the rest of the indexes and could suggest that tech stocks are becoming a new leader. The $55 level, which had been acting as a ceiling through December before being cleared this week, held on a few pullbacks. This is the first level to watch; also keep an eye on the $54 level for support on a pullback.


Source: StockCharts.com

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; there's a chance DIA could trade there soon. DIA continued to press higher, although it too showed an increase in volatility. However, DIA did defend its gap this week and should have some support near $115. But can it muster up the strength to power through $119?

Source: StockCharts.com

The iShares Russell 2000 Index (NYSE:IWM) ETF showed the most weakness this week. It has been leading the charge higher along with QQQQ, so perhaps some profit-taking was in order. However, traders should also be on guard for a possible rotation away from riskier stocks to safer stocks. The selling in IWM came on increased volume so traders should be cautious in the near future. Buyers stepped in to defend the $78 level, so this is the first level to watch. Looking above, a move above $80 could signal a resumption of the uptrend.


Source: StockCharts.com


Bottom Line
It's been commonly held that the markets usually finish the year in the same direction as the first week of trading. Despite the volatility, the markets did close out the week higher and the benefit of the doubt remains with the bulls. The Nasdaq 100 is at almost a 10-year high and is above its prior bull market highs, which is really quite surprising considering the extent of the recent bear market. However, traders need to be cautious as the markets are becoming overheated as the S&P 500 approaches a key level. Although the trend has remained higher, the market is becoming increasingly susceptible to a correction. If this correction occurs, it is likely to be swift, so traders should remain cautious moving forward.
(For more, see Support & Resistance Basics.)

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