The major index ETFs managed to recoup some losses this week, yet still remain within a short-term downtrend. While this week's action was mostly to the upside, for the most part, these ETFs could not climb above last week's high - resistance. Pushing through that resistance level is required if these markets are going to continue to recover. Failure to break resistance, and if certain support levels below are once again tested, these ETFs could see further declines in the coming weeks.
SEE: Interpreting Support And Resistance Zones
The S&P 500 SPDRS (ARCA:SPY) saw strong upside moves on June 5 and 6 but then couldn't keep the rally going on the 7, faltering at resistance. Resistance is now at $134, and a move above that level would negate some of the bearishness and could even trigger a bear trap rally. Further resistance is at $136 and $140, the latter of which is the target if we break back above $134. A drop below $129.50, on the other hand, is bearish and likely to result in a test of the recent low at $127.14. If that low is breached, the next downside target is at $126, followed by $122 (if we move below $126).
The Dow Jones Industrial Average SPDR (ARCA:DIA) surged higher on June 6, recovering a good chunk of the losses seen the week prior. The resistance level to watch is still overhead, though. If the ETF can climb back above $126, it could bring in additional buying. Additional resistance is at $128 and $131.50. A drop back below $122 has bearish implications, and provides further downside targets of $120, followed by $116 if the former is breached.
SEE: The Psychology Of Support And Resistance Zones
PowerShares QQQ ETF (Nasdaq:QQQ), representing the Nasdaq 100 index, also clawed back some prior losses this week. Resistance is at $63.15, and momentarily the ETF managed to move above this ($63.18) on June 7, but was quickly reversed. Therefore, this area still poses a hurdle the ETF must overcome if it is to continue moving higher. If a legitimate break above $63.18 occurs, the target, and next major resistance level, is $66. Support is $60 followed by $59. The $59 mark is important because it was a resistance area back in October and November, and should now support declines. If it does not, it is a longer-term bearish signal. The next target would be at $56, should $59 be breached in the coming week(s).
Russell 2000 iShares Index (ARCA:IWM) ETF, representing the Russell 2000 index, also bounced this week, but was unable to climb back above the pivotal $78 level. A drop back below $74.60 indicates continued selling and would be confirmed by a move below the recent low at $72.94. If this occurs, the next downside target is $71, followed shortly by $70, which are right in the vicinity of the long-term upward trendline going back to 2009. At this time, the short-term trend is down and that looks like it will continue. This ETF will need to get back above $78 in order to renew the hopes of the bulls. $78 is strong resistance; that was proven again on June 7, as the ETF made an intra-day high at $77.72 before declining. Until that resistance level is broken, being short is likely preferable to being long. Further resistance is at $80 and $81.
The Bottom Line
With the ETFs approaching resistance this week, this will be the crucial level to watch next week. How each ETFs reacts around their respective resistance level provides insight into the longer-term direction of the ETF. Failure to break through resistance means support is likely to tested, and if breached is likely to send the ETF lower. On the other hand, a break through resistance is likely to trigger buying interest and short-covering. The major support levels broken in prior weeks indicate these rallies are "bear-market rallies" and that means caution is still warranted when buying. Always use risk controls no matter which side of the market you are on.
SEE: Risk Management Techniques For Active Traders
At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.