After threatening to breakdown on Monday, the stock market reversed course and closed near its highs for the week. The result was a positive close for the week and it leaves the majority of the indexes still within their recent channel-bound trading range. I say majority because tech stocks continued to improve and helped lead the Powershares QQQ (Nasdaq:QQQ) ETF back above its 50 and 200-day moving averages. The rest of the indexes remain below these averages, so it remains to be seen if QQQ is an anomaly or a precursor to an improved market environment.

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Starting with the Powershares QQQ ETF this week, it is easy to see that the ETF is back within its prior base after testing the low $50s for a few weeks. QQQ stalled out on its first test of its 50-day moving average but was able to power through this week. While it is still well beneath its yearly highs, the technical picture has certainly improved. QQQ has been showing relative strength for weeks, which is a good sign for the markets. Of course, the million-dollar question is whether this strength will spill over to the rest of the indexes. (For more, see Moving Averages: Introduction.)

Several individual stocks have started to improve over the past couple of weeks, but the chart for the S&P 500 as represented by the S&P 500 SPDRS (NYSE:SPY) is still neutral at best. Part of the reason for this is the continued underperformance in the financial sector. It will be difficult for the markets to sustain any rally unless this group gets in gear. Looking at SPY, it is still within the channel it has established despite the bounce off this week's lows. SPY is setting up for a test of the top of the range and its 50-day moving average heading into next week where it could experience some increased selling pressure. How SPY handles this area will be key for the short-term direction of this market. Any severe failure here could send the markets back into a free fall.

The Diamonds Trust, Series 1 (NYSE:DIA) ETF looks like it will also be pressing higher into its 50-day moving average next week. It also has some key lateral resistance areas near $116 to $118 to watch, and could experience some increased selling pressure. While the bounce off the lows was a positive start, the key will be in how it reacts to increased distribution. This week's lows near $108 have become a key area to watch on the downside. Any break below this area could lead to new lows.

Unfortunately, the small caps as represented by the iShares Russell 2000 Index (NYSE:IWM) ETF continue to lag. While IWM only lagged QQQ in terms of percentage gained for the week, it is still well beneath its prior base and hasn't shown any clues that it is ready to resume a leadership role. IWM remains in the same channel type consolidation as SPY and DIA could be testing the top of the range as soon as early next week.

The Bottom Line
So after staving off a breakdown early in the week, the markets were able to muster a decent bounce back towards the top of the recent range. While this is a positive, the markets clearly have much work ahead of them if this rally is to stick. The short-term environment is already starting to get overbought and we haven't yet made any real upward progress. The ideal scenario may actually be a few days of sideways trading in order to work off some of the recent buying. This would set the stage for a rally attempt with more substance. However, if the markets fail miserably near the top of the range again, it could get ugly in a hurry. Stay on your toes ... as usual!

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