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Tickers in this Article: DIA, SPY, QQQ, IWM
The markets continued to display strength this week and have now erased most of their recent declines. The strength has been surprising in that the rally from the recent lows has barely paused on its ascent. Despite the surprising day-to-day strength in the general markets, there is an interesting sub-plot developing among the different sectors. Long-time readers know that we like to monitor the performance of the different index ETFs to help gauge market participants' appetite for risk, and the current market is sending very mixed signals. The small caps are rallying to new highs, while tech stocks are severely lagging. The two large cap indexes are somewhere in the middle and both remain below their prior highs, despite the impressive bounce. Tutorial: Technical Analysis

The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY), is one of the previously mentioned large cap indexes. Notice how despite the sharp bounce from its recent lows, it remains just under an important resistance level. While it has become increasingly difficult to doubt any strength in this market, the risk of a failure at this level is fairly high. The markets are already overbought on some indicators such as the McLellan Oscillator, and a clean breakout without a pause would be very prone to a reversal. Traders will need to keep an eye on how SPY deals with the $134-$135 level; a shallow pullback toward its rising 20- and 50-day moving averages would not be unexpected.


Source: StockCharts.com

The bounce in the Diamonds Trust, Series 1 (NYSE:DIA) ETF did carry the index to new highs, although just nominally. In fact, on a closing basis, DIA finished just under its February 18 closing price. While DIA has a high probability of retracing some of its recent gains, the recent strength should not be ignored. DIA had little trouble with the $122.50 area that acted as resistance in February through March, and this area may now act as support on any weakness. Below that, the rising 20- and 50-day moving averages should act as another possible support area.


Source: StockCharts.com


Where things start to get a little dicey is in the Powershares QQQ ETF (Nasdaq:QQQ), which represents the Nasdaq 100. Despite participating in the recent strength, QQQ is not anywhere near its February highs, and hasn't even cleared its March highs near $58. This negative divergence should not be ignored since this index has been leading the rally since its inception. Traders should keep a close eye on the $58 level as a break above this area could usher in participation from this group and help push the markets higher.


Source: StockCharts.com


If analyzing a negative divergence from the Nasdaq to the S&P 500 wasn't enough, the iShares Russell 2000 Index (NYSE:IWM) ETF is also throwing a monkey wrench into the equation. IWM is taking the opposite stance and has broken to multiyear highs and is actually testing its all-time highs. This is quite remarkable and this index appears very healthy right now after clearing its recent base. Traders should keep an eye on the $83 level moving forward as an area of support on any near-term weakness. If the breakout is real, IWM should hold above its prior base or at worst, very near the upper range.


Source: StockCharts.com


The Bottom Line
So how do we interpret this conflicting information? The first thing to note is that the market remains vulnerable here, as it is overbought and the large caps remain near important resistance levels. It is very possible to see some near term weakness, and there is no shortage of potential catalysts to spark a pullback either. Oil continues to rally and the situation in the Middle East remains in flux. However, the recent price action, especially when coupled with the strength in the small caps, revealed that there are still plenty of buyers behind this market. The probability that the March lows will hold as an important pivot low has risen exponentially due to the recent price action, and this still remains the line in the sand on intermediate and longer term charts. The markets and the markets appear poised for higher prices on the intermediate term as long as these lows hold.

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