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Tickers in this Article: DIA, SPY, QQQQ, IWM
The markets once again suffered through a bout of selling due to unrest in the Middle East. A few weeks ago, the markets were hit with a steep one-day pullback due to protests in Egypt that eventually forced Egyptian President Hosni Mubarak to step down. This week, the news turned to unrest in Libya as government forces enacted a violent crack-down on protesters. Sellers rushed to exit the markets and although they had recouped some of their declines by the end of the week, overall, the major indexes finished well off last week's highs. IN PICTURES: 9 Simple Investing Ratios You Need To Know

Below is a chart of the Diamonds Trust, Series 1 (NYSE:DIA) ETF; despite the weakness seen this week, the average remains in a strong trend higher. Notice that this week's pullback halted at an uptrend line marking the three most recent pullbacks. This trendline, as well as this week's low just under $120, are the two levels to watch as we head into next week. A break below the line will likely signal at least some consolidation; another break below $120 could imply further downside. (For more, see Track Stock Prices With Trendlines.)


Source: StockCharts.com


The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY), also pulled back to a rising trendline earlier this week, but unlike DIA, SPY actually closed underneath this level for a couple of days. It managed to get back above the trendline by Friday, but the high volume selling may be taking its toll. While the market has proved to be extremely resilient over the past few months, this week's pullback should act as a warning for complacent traders. This week's low near $130 for SPY is an important level to watch; if SPY drops below this level, it would likely coincide with a close beneath its 50-day average as well. This could lead to further consolidation or even a correction.


Source: StockCharts.com

The Powershares QQQ ETF (Nasdaq:QQQQ), which represents the Nasdaq 100, actually fell through an important support level this week and tagged its 50-day moving average. This was the first trip to the 50-day moving average in several months and it occurred on high volume. While the initial bounce from this level was sharp, QQQQ will likely need some time to absorb this selling pressure. A retest of the 50-day moving average in the next few days should not be ruled out. QQQQ could actually be two-thirds of the way through forming a head-and-shoulders top, so traders should definitely stay on guard for the next few days to see if QQQQ can stabilize and push higher.


Source: StockCharts.com


The iShares Russell 2000 Index (NYSE:IWM) ETF held up better than IWM this week, which can be seen as a positive sign. These two indexes should lead the markets and selling in them should not be ignored. IWM did pull back to its 50-day moving average for the second time in as many months, so this week's low just under $80 should be watched. This level also coincides with the top of IWM's recent base; a drop under this level would certainly be a negative. While the near-term picture is uncertain at best, IWM remains just a few points from new all-time highs.

Source: StockCharts.com


Bottom Line
For the second time in a few weeks, traders are left to ponder whether the recent weakness will lead to a larger correction or whether buyers will step in once again. Unfortunately there is no easy answer to this question. This dilemma is what makes trading difficult. The best traders simply reduce their risk in uncertain times and then remain open-minded to any possibility. We've been noting that the markets have been vulnerable for weeks, but every dip continues to be bought. What makes this environment dangerous is that traders have been conditioned to buy the dip, despite the fact that anything that works too easily in the markets won't remain that way for long. There are plenty of levels to watch that will alert traders to the danger of further downside, so that is where most eyes should be focused. If the markets can stabilize without violating these levels then we could be set for even more upside.

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