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Tickers in this Article: DIA, SPY, IWM, QQQ
Volatility continued to rule this week as the markets experienced a negative close every single day. Overall, the markets ended well off their recent highs, and most indexes also fell back below their 50-day moving averages. With all the uncertainty surrounding a debt reduction deal in Washington, it has been very difficult for the markets to sustain any semblance of strength. The stock market is already oversold on many measures and rapidly approaching recent support levels. This could be setting the stage for a bounce next week, but there is always the possibility of a flush, especially in this news driven market.

The S&P500 as represented by the S&P 500 SPDRS (NYSE:SPY) had a near vertical decline this week as it retreated from the $135 level. SPY had a difficult time sustaining any intraday strength as it seemed a politician was on television doubting a deal at every turn. SPY is rapidly approaching its 200-day moving average and a rising trendline that has held as support on recent declines. Overall, SPY remains in a wide consolidation and whatever happens in Washington next week will likely drive SPY out of the range.

The Diamonds Trust, Series 1 (NYSE:DIA) ETF was also in a freefall this week. DIA sliced through its 50-day moving average and also cut an important low near $123. Volume has also increased on this down turn and DIA is in danger of forming a larger overall top. The $127 level has now held as resistance on three occasions and DIA has set a lower low. While the markets may be due a short term bounce, it does appear as if DIA is on its way for a test of the $119 level. (For more, see Moving Averages: Introduction)

The one positive sign for the markets recently has been the strength in the Powershares QQQ ETF (Nasdaq:QQQ) ETF. QQQ was able to hit new highs earlier this week, although it did reverse back into its base. While the reversal may be significant, QQQ was able to hold above its 50-day moving average and its July lows. This is the ETF one would expect leadership from, so it will be a good sign if QQQ can maintain its leadership moving forward. The $57 area will be one level to watch in the coming week if the markets continue to sell off, as this level held on the last pullback.

While the leadership in the tech sector was a positive, the underperformance in the iShares Russell 2000 Index (NYSE:IWM) ETF was a little troubling. This is the other sector where investors may look for leadership, and unfortunately, IWM suffered a steep decline for the week. One slight positive is that IWM was able to close above its 200-day moving average after gapping well below it on Friday. IWM is back towards the bottom of its base and it appears it will need much more time before its ready to attempts a breakout above the base.

Bottom Line
With the markets already oversold, the possibility for a bounce is fairly high. The problem is that many of the indexes have suffered extensive damage recently. While there are still a few stocks acting well, the vast majority of stocks have been weak. The number of stocks trading above their 40-day moving average is down to near 30% after being as high as 77% earlier this month. This reveals broad based selling across many sectors. As is common with the stock market, there are mixed signals pointing in different directions. Overall though, what is clear is that the market is in a dangerous area. Oversold markets can, and often do become more oversold, especially when driven by a news event. While the odds favor a significant bounce in the near future, the market doesn't always follow the blueprint. Traders need to stay on their toes and simply reduce risk until a more clear picture emerges. Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

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