The markets traded sideways this week as they continued to consolidate the recent bounce off the March lows. While Friday ushered in a little more volatility and a push lower, most of the market index ETF's basically closed at just about unchanged for the week. Even Friday's volatility and weakness was met with buying towards the end of the day that prevented a weak close. While a consolidation would hardly be cause for a celebration, it is pretty remarkable that the markets have not reacted much to the recent surge in oil prices. The light sweet crude closed above $113 a barrel this week helped in large part by new lows in the US Dollar. With other commodities closing at new highs (silver, gold, corn) it will be interesting to see how long the markets can ignore inflation pressures. Most of the market index ETF's are still trading well above their 20 and 50-day moving averages and it would take much more selling to seriously damage the structure of the recent bounce.
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The S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) for instance, remains well above its 20 and 50-day moving averages despite the negative close on Friday. The decline on Friday was really not a big deal when looked at as a percentage move, but it did come at a critical level. SPY was unable to close above the $134 level and it looks like it has started to pullback from this area. One possible area to watch for support would be near its rising 20 and 50-day moving averages near $131. This area could bring in buyers, but ultimately, the key level moving forward remains the lows set in March. Looking above, the $134 level is the key to a breakout.
The Diamonds Trust, Series 1 (NYSE:DIA) ETF is technically in better shape, despite what looks like a very similar chart to SPY. DIA managed to clear its February highs last week and all of this week's consolidation remained above this level. Even Fridays dip managed to bounce back and close above the February high closing price of $123.60. While DIA held above this level, there is a chance it dips under this on any weakness next week. The next level to watch would be near $122-$122.50 which was an important level in March and April.
The Powershares QQQ ETF (Nasdaq:QQQ) which represents the Nasdaq 100 continues to lag its peers, but it has been holding up above its 50-day moving average as it drifts lower. The recent price action is starting to resemble a flag which is a positive sign. There has been no real urgency on the part of sellers despite overall weakness in key components like Apple, Inc. (Nasdaq:AAPL) and Google, Inc. (Nasdaq:GOOG). If QQQ can hold near current levels and then climb back above the $58 level, it could signal an end to the consolidation.
The iShares Russell 2000 Index (NYSE:IWM) ETF suffered the sharpest declines to close out the week, but also remain above a key support level. The $83 level is marking the top of the prior base and should act as a support level moving forward. Traders should continue to monitor this level to see how IWM fares on any weakness. If IWM fails and falls back into the prior base it could signal a potential bull trap which could lead to sharper declines.
Much like last week, the market remains vulnerable. However, markets can correct through time and the markets have actually strung together about eight days of narrow sideways price action. Considering the markets were overbought and other factors like rising oil prices are basically being ignored, this is actually revealing an underlying bid. The more the markets trade sideways before an attempted break in either direction, the more likely the move will follow through. If the markets can drift for a few more days, its possible they will once again surge to new highs.
Charts courtesy of stockcharts.com