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Tickers in this Article: DIA, SPY, QQQQ, IWM
The past several weeks have been very difficult for traders who believe that the markets are headed for a pullback. It seems like any signs of weakness have been quickly overcome by the bulls and the markets continue to chug along as they race to new highs. While it is prudent to preach caution when the markets are in such a strong uptrend, the simple fact is that there is no evidence yet of a market top. It is wise for traders to respect this strength and simply recognize that the environment is overbought. In his famous quote, John Keynes stated that "the markets can remain irrational longer than you can stay solvent." Whether you believe this rally makes sense or not, the bottom line is that the markets' upward march continues.

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Below is a chart of the Diamonds Trust, Series 1 (NYSE:DIA) ETF, which is showing a remarkable trend for an index. This is the type of chart you would see for a momentum stock, not an average of blue chips. DIA is once again extended from its 50-day moving average and is definitely overbought, but the trend remains clearly higher. Beyond this, DIA has been able to distance itself from the $120 level we had been highlighting as resistance. This area should now become a support level and traders should watch this level on any weakness as an area where buyers may step in.


Source: StockCharts.com


The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY), was also able to create some separation from long-term resistance near $130. This was the area were SPY really broke down during the financial crisis and was where the selling threatened to derail the rally a couple of weeks ago. Now that SPY is past this level, traders should monitor this area for support in case the markets show any weakness moving forward.


Source: StockCharts.com

Even the Powershares QQQ ETF (Nasdaq:QQQQ), which represents the Nasdaq 100, has been able to get back on track. The index was relatively weaker on Thursday and Friday, but this seems to be of little concern to the bulls as they send the index back near 10-year highs. The nearby 50-day moving average will likely act as a floor for QQQQ. With the $57 level marking the top of a consolidation pattern, this is the area that traders should watch in case of weakness. QQQQ remains one of the more important indexes to watch and any market weakness will likely appear here first. (For more, see Technical Analysis: Introduction.)


Source: StockCharts.com

The iShares Russell 2000 Index (NYSE:IWM) ETF also managed to shrug off relative weakness and has rebounded to new recovery highs this week. In fact, IWM continues to inch toward its all-time high near $85. The recent consolidation in IWM is a little sloppy, but the $80 level appears to be the area to watch on any weakness. This was the area that IWM pulled back from in January and then struggled to clear a few weeks later. While volume has been lackluster, the fact that IWM is at new highs is very positive for the markets. IWM represents the small caps and is a very good gauge as to how market participants feel about a huge segment of the economy.


Source: StockCharts.com


The Bottom Line
Last week, we reminded traders of the importance of remaining open-minded and flexible. This is obviously still the case and every dip this week was quickly bought. At some point, this behavior will be punished; after all, the market never offers up an easy trade for long! This is what makes trading so hard, especially for beginners. On the one hand, the market continues to rise every day, on the other, the environment also becomes more dangerous as the days progress. This is why we constantly preach for traders to stick to the best setups with the tightest measure of risk possible. Traders should pay close attention to the patterns that have developed the past few weeks, especially in QQQQ and IWM. A market reversal will likely begin with a breakdown under these patterns in these names. Until then, the rally must be presumed alive and well.

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