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Tickers in this Article: DIA, IWM, SPY, QQQQ
After gapping lower to start the week, the markets quickly stabilized and found buyers. They finished the week near their highs and are solidly in the positive for the year. While the markets have been overbought, the rally has continued with only a few minor days of selling. The markets have been exceptionally strong over the past several weeks and traders should respect this strength. Despite the fact that the markets are approaching some important resistance levels, traders should remain patient and simply take what the market is giving them. So far every dip has been bought and there are still no signs that the market is anywhere near done with this rally.

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The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY), rallied to new recovery highs this week and remains in a steady uptrend. SPY continues on its march toward testing the $130 level, which was an important pivot high in 2008. The breakdown from this level precipitated the worst part of the bear market and remains the key level to watch for possible resistance. However, it bears mentioning that the other indexes are already past these levels and the longer term trend in SPY is also showing some strength. (For related reading, check out Market Strength Introduction.)

SPY (S&P 500 SPDRs) January 14, 2011
Source: StockCharts.com
The Powershares QQQ ETF (Nasdaq:QQQQ), which represents the Nasdaq 100, is actually trading at highs that haven't been seen since March of 2001. That is almost 10-year highs for the tech-laden index and this could be a very clear sign that this group may lead the next bull market. It can be argued that QQQQ has been in a massive long-term correction and that it may finally be resuming its uptrend. Because this group has been leading, traders should monitor this index for clues about the rest of the markets.

QQQQ (Powershares QQQ Trust) January 14, 2011
Source: StockCharts.com

Much like SPY, the Diamonds Trust, Series 1 (NYSE:DIA) ETF is very close to testing a key high from 2008. DIA closed the week at $117.66, or just about a buck away from its August 2008 high of $118.73. This area may bring in an influx of sellers, so traders should remain cautious until the markets reveal their hand.

DIA (SPDR DJ Industrial Average ETF Trust) January 14, 2011
Source: StockCharts.com

One more positive sign for the markets this week is that the iShares Russell 2000 Index (NYSE:IWM) ETF solidly held support near its 20-day moving average and then surged to new highs. While the overall volume may have been lackluster, the bottom line is that IWM is only five points from all-time highs and above its recent consolidation. Until IWM falls under support it would be risky to doubt the rally.

IWM (Russell 2000 iShares) January 14, 2011
Source: StockCharts.com
The Bottom Line
It has been an interesting start to the year so far. The markets are hitting some major milestones as the Nasdaq 100 and Russell 2000 clear very important levels. While the markets are likely close to at least a minor correction, there are plenty of signs that there is more room to advance longer term. Many groups associated with an early bull market like the transports and tech stocks are clearly outperforming. There are often periods in the markets where the odds of a reversal begin to rise, but where the market continues to present great trading opportunities. I believe this is one of those periods and as such traders should work to take only the best setups, but also respect the fact that the market continues to press higher. By limiting yourself to only the highest quality setups, you can remain exposed to the strength while keeping your risk to only the best opportunities. (For more, see Technical Analysis: Introduction.)

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