Tickers in this Article: SPY, DIA, QQQQ, IWM, AAPL
The general markets continued to slide last week and had a huge gap down on Tuesday following a terrible day in the Japanese markets amidst increased nuclear meltdown fears. While the markets rose virtually all day to recoup a large portion of the gap lower, they promptly gave it all back on Wednesday by breaking to new lows on even higher volume. Despite the new lows, the bulls fought back with a vengeance and the markets gapped higher on Thursday and then Friday. While it was a tremendously volatile week that actually included some buying strength, the markets really couldn't make any progress and finished well off last week's close. Tutorial: Technical Analysis

For instance, The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY), hit a low near $129.50 last week and finished last week under $128. SPY is clearly under its prior base and volume continues to increase on the slide down. The buying that appeared near $125 was a positive sign, but traders need to be fully prepared for a retest of these levels in the near future. Markets rarely bounce in a V pattern, and even if this proves to be a key support level, SPY could easily drop under this level to shake out more bulls. Of course, the markets could continue pressing lower and the next level for possible support would be near $122.50, which coincides with a pivot high back in November. Looking above, the $130 level appears to be the area that is likely to introduce the most selling pressure.


Source: StockCharts.com


The Diamonds Trust, Series 1 (NYSE:DIA) ETF is trading in an almost identical pattern to SPY. It broke under its base earlier this month and sliced under its 50-day moving average a few sessions later. Last week saw even more volatility, as the DIA tried to recover from Tuesday and Wednesday's declines. The recent low near $115 is the obvious level to watch, but it's possible that sellers will drive DIA under that low on what could even turn out to be a retest. This is one reason why trying to pick a bottom is so difficult. Even if the markets eventually hold near these levels, there could be one or more shakeouts.


Source: StockCharts.com


The Powershares QQQ ETF (Nasdaq:QQQQ), which represents the Nasdaq 100, has been struggling even more than the others. As a result, even Apple (Nasdaq:AAPL), which has been Wall Street's darling stock for years, suffered through its first close under its 50-day moving average since last September. Apple is a large component of QQQQ and is often used as a leading indicator for the ETF. QQQQ has stiff resistance just above $57 and strong support just below $54. Traders should watch to see how the ETF deals with these areas while keeping an eye on what transpires with AAPL.


Source: StockCharts.com


The iShares Russell 2000 Index (NYSE:IWM) ETF closed last week somewhere in between QQQQ and SPY. IWM closed almost exactly at its 50-day moving average, but ended in a similar position where it is under most of the recent price action. The $83 level proved to be very stiff resistance and IWM is now in danger of forming a top. Traders should closely monitor this week's low; a close beneath this level could lead to a test of the $77 level. (For more, see The Moving Average Bounce.)


Source: StockCharts.com


The Bottom Line
The markets ended last week oversold and this is likely a big part of why they bounced today. However, traders should not bank on this being a lasting move. It's rare for the markets to form a V shaped bottom and even if this week's lows prove to be important, there will likely be at least one retest in the near future. Beyond this, there are no guarantees that this week's lows are anything more than part of a move that takes the markets even lower. Traders need to continue to practice caution because trading these markets remains very risky. The potential for a snap-back rally certainly continues to exist - as shown by Monday's rally - but only the most nimble traders should attempt trading this aggressive setup. Intermediate term swing traders are better served waiting until the markets settle down and develop more clear support and resistance levels. In either case, protecting trading capital should be the priority for most traders. (For more, see Technical Analysis: Introduction.)

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