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.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

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!

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Charts courtesy of stockcharts.com

Related Articles
  1. Active Trading Fundamentals

    4 Stocks With Bullish Head and Shoulders Patterns for 2016 (PG, ETR)

    Discover analyses of the top four stocks with bullish head and shoulders patterns forming in 2016, and learn the prices at which they should be considered.
  2. Chart Advisor

    Uptrending Stocks Dwindle, a Few Remain (EW, WEC, WR)

    The number of uptrending stocks is shrinking, but here a few that remain in uptrends.
  3. Chart Advisor

    Trade Setups Based on Descending Trend Channels (LBTYK, RRC)

    These descending trend channels have provided reliable sell signals in the past, and are giving the signal again.
  4. Chart Advisor

    How Are You Trading The Breakdown In Growth Stocks? (VOOG, IWF)

    Based on the charts of these two ETFs, bearish traders will start turning their attention to growth stocks.
  5. Mutual Funds & ETFs

    Pimco’s Top Funds for Retirement Income

    Once you're living off the money you've saved for retirement, is it invested in the right assets? Here are some from PIMCO that may be good options.
  6. Chart Advisor

    Watch This ETF For Signs Of A Reversal (BCX)

    Trying to determine if the commodity markets are ready for a bounce? Take a look at the analysis of this ETF to find out if now is the time to buy.
  7. Mutual Funds & ETFs

    ETFs Can Be Safe Investments, If Used Correctly

    Learn about how ETFs can be a safe investment option if you know which funds to choose, including the basics of both indexed and leveraged ETFs.
  8. Mutual Funds & ETFs

    The Top 5 Large Cap Core ETFs for 2016 (VUG, SPLV)

    Look out for these five ETFs in 2016, and learn why investors should closely watch how the Federal Reserve moves heading into the new year.
  9. Chart Advisor

    Breakout Opportunity Stocks: CPA, GNRC, WWE

    After a period of contracting volatility, watch for breakouts and bigger moves to come in these stocks.
  10. Economics

    India: Why it Might Pay to Be Bullish Right Now

    Many investors are bullish on India for all the right reasons. Does it present an investing opportunity?
RELATED FAQS
  1. What is Fibonacci retracement, and where do the ratios that are used come from?

    Fibonacci retracement is a very popular tool among technical traders and is based on the key numbers identified by mathematician ... Read Full Answer >>
  2. Should mutual funds be subject to more regulation?

    Mutual funds, when compared to other types of pooled investments such as hedge funds, have very strict regulations. In fact, ... Read Full Answer >>
  3. Do ETFs pay capital gains?

    Exchange-traded funds (ETFs) can generate capital gains that are transferred to shareholders, typically once a year, triggering ... Read Full Answer >>
  4. How do real estate hedge funds work?

    A hedge fund is a type of investment vehicle and business structure that aggregates capital from multiple investors and invests ... Read Full Answer >>
  5. Are Vanguard ETFs commission-free?

    While some Vanguard exchange-traded funds (ETFs) are available commission-free from third-party brokers, a large portion ... Read Full Answer >>
  6. Do Vanguard ETFs require a minimum investment?

    Vanguard completely waives any U.S. dollar minimum amounts to buy its exchange-traded funds (ETFs), and the minimum ETF investment ... Read Full Answer >>
COMPANIES IN THIS ARTICLE
Trading Center