Tickers in this Article: SPY, DIA, QQQ, IWM
Markets continued to decline this week, erasing most gains seen since the middle of January. For the first time since January 18, the S&P 500 traded below 1300, a pivotal support level, and the last vestige of hope for the bulls. If significantly penetrated, it would signal that this is a bear market and any short-term bounces are likely to be hiccups in a longer-term decline. Contrary to prior weeks when the index ETFs were not confirming each other, this week, all the major index ETFs fell and are very close to pivotal support (as mentioned in the S&P 500) or have already moved through it. This means the hope of a major rally is greatly diminished, although each individual ETF presents its own unique opportunities and risks.

SEE: Support And Resistance Reversals

The S&P 500 SPDRS (ARCA:SPY) approached critical support on Friday between $130 and $129.42. This support area is created by the January 30 intra-day low at $130.06 and the October 27, 2011 intra-day high at $129.42 (now as support level). If this is a bull market, this current move down should not penetrate into the initial wave of this uptrend (marked by the October 27 high) that began back in early October. Penetration below $129.42 signals the uptrend is indeed over and corrections higher should be viewed as selling or short-selling opportunities. Resistance on upside moves is likely to develop just above $134 and at $136. If $129.42 is not penetrated, this could be a low-risk buy entry opportunity, as a stop can be placed just below that price.

The Dow Jones Industrial Average SPDR (ARCA:DIA) is also coming very close to testing its October high (which is a support level) at $122.58. While trendlines and minor support have been broken on the recent decline, this could still arguably be a correction within a longer term trend, as long as $122.58 is not penetrated. If penetrated, similar to the S&P 500 SPDRs, any bounces should be used as sell or short-selling opportunities. On a positive note, volume has not really picked up on recent selling. On-balance volume did show a bearish divergence at the recent high at the start of May and has already dropped by support level created by the October high - a negative sign. Resistance on bounces is likely to materialize between $127 and $127.25, followed by $130. If $122.58 is not penetrated this could be a low risk buy opportunity, as a stop can be placed just below this level.

SEE: Interpreting Support And Resistance Zones

PowerShares QQQ ETF (Nasdaq:QQQ), representing the Nasdaq 100 index, has been falling since it hit a 52-week high on April 3 at $68.55. In the last two ETFs discussed, the current price has been compared to the October high. In the case of the PowerShares QQQ it still remains relatively strong compared to the other ETFs in that regard. The October high at $59.20 still remains some distance away, but as of late, the ETF has given back a lot of ground. While the current correction is sizable, it is again arguable that the trend is in place until the price moves into the price area seen in October of 2011 (the initial wave higher in this current trend). Therefore, if support develops before $59.20, it presents a low-risk opportunity as a stop can be placed just below that level. On the other hand, if $59.20 is penetrated all short-term rallies should be used as selling and short-selling opportunities. Given that this support is still some distance from the current price, the immediate outlook is uncertain. Resistance on upside moves is likely to develop at $63 to $63.25, followed by $63.90 and $65.

Russell 2000 iShares Index (ARCA:IWM) ETF, representing the Russell 2000 index, which has been the weakest of the major index ETFs (discussed here), has already penetrated and cleared all major support levels. This signals that this ETF is in a bear market and any rallies that remain below the recent high at $84.66 (quite a distance away now) are selling and short-selling opportunities. The target for the current downside move is $72 based on the breakout from the range that contained the ETF from February through to May 11. Rallies in price are likely to see significant resistance at $78 followed by $79.60 and $81 to $81.50.

The Bottom Line
Each ETF presents its own opportunities and risks, but there is no question this market is at a critical inflection point. Based on the breach of several support levels and trendlines, some would argue we are already in a bear market. For some ETFs, there is still a glimmer of hope, though, as the last critical support level has yet to be penetrated. That said, if that support level is penetrated, the continued declines could be rapid and severe. The Russell 2000 iShares ETF is already in a bear market and should be traded as such. Caution and risk management should be of the utmost concern on both sides of the market, as current conditions could lead to even greater volatility.

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At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.

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