Despite a few attempts at a bounce, the markets ended the week lower once again, making it seven straight weeks down. Last we week we noted that "The majority of the week was spent moving lower, with any attempts at strength being quickly rebuffed" and this week followed the same pattern. The markets are certainly oversold and a bounce may be imminent, but that doesn't mean traders should become aggressive. The first bounce attempt is likely to be faded rather quickly, and only the most aggressive traders (or very long term value investors) should even bother trying to time this market.
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While the S&P500 as represented by the S&P 500 SPDRS
) appears to be trying to find support already, the March lows and 200-day moving average near $126 may act as a magnet in the near term. Often these important levels draw prices to them as a form of self fulfilled prophecy. This means SPY could drop some more before any bounce materializes. In fact, it could experience a flush below this level forcing traders to capitulate. While this is all speculation, the point is that traders should not get too comfortable playing for an oversold
bounce. While likely, it could force a trader to endure more pain than they expect.
The Diamonds Trust, Series 1
) ETF filled a key gap
this week and the level acted as support
. DIA also remains well above its March lows and 200-day moving average. If the markets are going to bounce here, this would be a key level to watch. A drop below this weeks low would imply a test of the March lows and its 200-day moving average near $115.
The Powershares QQQ ETF
) ETF continues to suffer through a steady diet of selling. QQQ already undercut its March lows, and ended the week very near this low. This development should not be taken lightly as even leaders like Apple, Inc.
) ended the week on a sour note. In fact, AAPL closed underneath its 200-day moving average
for the first time since April 8, 2009. This is not the type of price action consistent with a strong market, and traders should definitely tread carefully on tech stocks.
The iShares Russell 2000 Index
) ETF continued to test the bottom of its base, and so far, appears to be holding the $77 level. This area has held as support on several occasions since IWM cleared it back in December, 2010. This may be one place to watch as a leading indicator for a possible bounce in the markets. If IWM can rally off this support level, it may help lift the rest of the markets. (For more, see Tales From The Trenches: Location Is Everything)
The markets continue to deteriorate, and while a bounce is likely soon, the markets can always become more oversold first. Catching bottoms is one of the hardest types of trading to be successful at, and swing traders should likely remain patiently on the sidelines until the markets present a better opportunity. I always find it hard to make recommendations on this type of article because of the variety of trading styles out there, so the simplest way for me to offer up my analysis is to state that; The markets are oversold by a variety of measures and likely due a short term bounce, however, it is also not likely to have a sustainable rally in the near future either. There are plenty of trapped buyers overhead, and it will take some time to absorb some of this selling pressure. Knowing your trading methodology and having the discipline to stick to it is most important at times like these. These are the markets that separate the traders who are consistently profitable from the revolving door of amateur traders. Undisciplined traders simply get eaten alive in this market. (For more, see Using Technical Analysis To Develop Trading Strategies
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