Stock stabilized this week, but after an early week rally, the market failed to make further headway. The bounce off a major support level in the S&P 500 is a promising sign, but the potential for further declines is still possible. While the short-term trend is currently down, the longer-term trend (going back to 2009) remains up. Each ETF also has its own dynamic and the immediate support and resistance surrounding current levels should be watched, as they are likely to play a role in the longer-term movements of the index ETFs as well.

SEE: Interpreting Support And Resistance Zones

The S&P 500 SPDRS (ARCA:SPY) recovered nicely on Monday (May 21) from the prior week's losses. Tuesday (May 22) was also strong intra-day but corrected by the close. Trading the rest of the week was confined between the May 21 close at $129.95 and the May 22 high at $133.23. If the price moves above the May 22 high, especially on a closing basis, the short-term momentum will be to the upside. Resistance comes in relatively quickly, though, at $136 followed by $139.50. The price to watch on the downside is the May 18 low at $129.55. If that is penetrated, it signals the current current short-term trend is continuing. In very close proximity is support at $129.42, and if broken, it means the rally that began in October of 2011 is over - a continued decline becomes much more probable.

The Dow Jones Industrial Average SPDR (ARCA:DIA) also created a short-term range this week. The intra-day high on May 22 is the spot to watch on the upside, with a rally above it likely to trigger further buying. Resistance comes in at $127, $128 and then $131.30. On May 23 the stock made a new fresh intra-day low to levels not seen since January. If the price moves back below that level, $122.82, the short-term downtrend is continuing. There is crucial support at $122.58, and if penetrated, it signals an end to the rally that began in October of 2011. Prices could go much lower if that occurs (over the next several weeks and months), although there is support along the way at $122 and $117.

SEE: Gauging Support And Resistance With Price By Volume

PowerShares QQQ ETF
(Nasdaq:QQQ), representing the Nasdaq 100 index, stabilized this week and has created a short-term pennant formation. This is usually considered a continuation pattern, indicating that further declines could materialize. Ultimately, though, there are more important levels to watch. A rise above the May 22 high at $62.95 is likely to trigger some buying interest. Resistance is at $64.50, $65.25 and $66.25. A move back below the May 18 low at $60.76 would erase all the gains made this week and signal a continuation of this current move down. There is little support until $59.80, followed by major support at $59.20.

Russell 2000 iShares Index (ARCA:IWM) ETF, representing the Russell 2000 index, also recovered this week and is pushing back toward major resistance at $78. From February to April, the stock was stuck in a range, and broke to the downside in early May. That breakout price, of roughly $78, is likely to be an area of significant resistance if the ETF can claw back to that price region. On May 21, the ETF also created the lowest intra-day low ($74.41) seen since early January. If the price moves back through that low, it signals continued selling. There is little support until $71.

SEE: 3 Types Of Indexing For ETF Success

The Bottom Line
The stabilization this week is a positive sign, but downside risk still exists. The ETFs each created their own consolidation this week, and a breakout of that consolidation will provide short-term price action clues. Signals are more reliable when all the ETFs confirm. If a breakout occurs, look for the other index ETFs to also be moving in the same direction. Without confirmation, signals are more likely to fail in individual ETFs.

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

Charts courtesy of Stockcharts.com.

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

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