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Tickers in this Article: DIA, QQQ , IWM, SPY, GOOG, INTC, AAPL
After a gap down on Monday, the markets spent the rest of the week recovering as they rose to fill the gap. The bounce higher throughout the week served to relieve some of the oversold tension in the markets; they are now in more serious danger of breaking down. Most of the indexes are following a similar pattern of pulling back in a channel toward their prior bases. However, they continue to set lower lows each week, and if they break to new lows again it could lead to increased selling pressure.

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The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY), has already fallen well into its prior base as it drifts back during its consolidation. It still hasn't technically formed a top, as it has held above its last pivot low near $129 set in April. It is also well within the channel it has been following; a move above it would likely signal an end to the consolidation. However, a move back down to new lows could lead to a break under the channel. Traders should keep a close eye on how SPY interacts with its 20- and 50-day moving averages over the next few days. The longer SPY stays under these key levels, the more likely a much deeper summer correction becomes. (For more, see Channeling: Charting A Path To Success.)


Source: StockCharts.com

The Diamonds Trust, Series 1 (NYSE:DIA) ETF continues to follow a similar pattern to SPY as it pulls back in a channel. It is still flirting with its prior breakout point rather than falling deep into its prior base in a show of relative strength. However, this week's bounce just barely filled the gap this ETF left on Monday, and Friday's close ended in a doji right on DIA's 50-day moving average. Buyers are not showing much enthusiasm, so a drop below last week's lows is likely to lead to a test of $120.

Source: StockCharts.com

The Powershares QQQ ETF (Nasdaq:QQQ) is definitely in worse shape than SPY and DIA right now. The tech index fell under the $57 level and never filled the Monday gap. In fact, QQQ stayed beneath its 50-day moving average all week and has been among the weakest of the index ETFs. Apple (Nasdaq:AAPL), Google (Nasdaq:GOOG) and even Intel Corp. (Nasdaq:INTC) all continue to underperform and weigh down on the index. As a leading index, the performance in this ETF bears watching moving forward as it should lead the way in either direction.


Source: StockCharts.com

As another leading index, the iShares Russell 2000 Index (NYSE:IWM) ETF is worth tracking as an indicator. This is the first indicator to start flirting with a breakdown, and it started the week with a brief dip below its April lows. IWM did rebound sharply, but finished the week within the channel it has been following as it consolidates. One bright spot that may have gone unnoticed, is that IWM did manage to close back above its 20- and 50-day moving averages. While the averages are simply a guideline for a trend, it was a positive development for the ETF. Traders should keep an eye on the $84 level for the possibility that IWM surprises the market with strength.


Source: StockCharts.com

The Bottom Line
Despite moving higher for most of the week, from a technical perspective, the markets have actually taken a turn for the worse since the gap. As you can see from the charts above, the markets continue to consolidate, but the fact that some of the indexes are back in their bases is revealing some weakness. Beyond this, the markets have relieved themselves of some of the recent oversold pressure without making much headway. This is certainly an area where traders should act defensively, and wait to see what transpires. If the markets can break free of the channels they have been following and begin to consolidate, this may present a decent buying opportunity for investors. However, if the markets continue to slide, it may be difficult for heavily invested traders to sidestep the loss. Sitting in cash is a viable strategy during times of indecision, and this is a point where the markets could break in either direction. (For more, see Analyzing Chart Patterns.)
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