What started out as a bullish week, with stocks pushing higher, ended abruptly on Thursday (June 21) as the market had one of the largest single day declines of year. The S&P 500 SPDR ETF (ARCA:SPY) fell roughly 2.2% on Thursday, and with similar declines in the other indexes, bearish chart patterns emerged. Thursday's decline wiped out multiple days of gains, signaling an end to the short-term rally we have been in since the start of June. While this pattern is present - equatable to multi-day bearish engulfing pattern (a big down day that completely wipes out the prior up day) - it is possible that a further rally could develop. The markets are still above the support levels mentioned last week because of the upward direction at the start of the week. Focus does appear to be shifting to the downside, though, as each of these ETFs once again approached crucial levels, and enthusiasm is coming in on selling, not buying.
SEE: Building An All-ETF Portfolio
S&P 500 SPDRS broke above short-term resistance at $134.25 during the week, but was quickly corrected by the Thursday decline. This has created a new resistance area at $136.25. A move above $136.25 could spark additional buying interest, as those that sold on Thursday clamor to cover short positions. Additional resistance is at $139.40. If the rally does occur, it is unlikely to create a new 52-week high in light of the current chart set-up. A drop below $131 (support) confirms the bearish indicators already in place and is likely to result in a test of the recent low at $127.14 (unadjusted). If that low is breached, the next downside target is at $126, followed by $122 (if we move below $126). As indicated last week, volume increased in May as the market declines, but volume has been weaker in June while the market rallied. The lack of buying enthusiasm on rallies confirms the bearish tone this week, and provides evidence that further declines could materialize.
The Dow Jones Industrial Average SPDR (ARCA:DIA) also sold off on Thursday, but remains above support at $123.50. While the drop this week was bearish, the trend is still higher for the month of June; therefore, further advances can't be ruled out. If the ETF can climb back above the recent high at $128.71, watch $130 and $131.50. One hundred and thirty dollars is the target now that it's surpassed $128, and $131.50 is just below the 52-week high at $133.14. A drop back below $123.75 has bearish implications, and provides further downside targets of $120, followed by $116 if the former is breached.
SEE: Support And Resistance Reversals
PowerShares QQQ ETF (Nasdaq:QQQ), representing the Nasdaq 100 index, broke above resistance at $63.50 this week, but was halted by resistance at $64.50 (June 20 high was $64.57). If the ETF can rally above $64.57, the next resistance level is not till $66. From the middle of March to the beginning of May, $66 to $68 was a high traffic area. The area is therefore likely to act as resistance and will be tough to penetrate. A drop below $61.50 on the other hand is likely to trigger selling into support. Support is at $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 managed to break above the pivotal $78 resistance level during the week, but finished the week back below it. $78 was a strong former support level that has now become resistance. That the ETF managed to get through the barrier is a positive sign, but without continued strength the barrier breach is moot. A rise above the June 20 high at $79.08 is required to signal a bullish follow-through. If that occurs, additional resistance is at $80 and $81. A drop back below $74.60 indicates more selling, and that a move below the June 4 low at $72.94 is likely. If that materializes, the next downside target is $71, followed shortly by $70, which is right in the vicinity of the long-term upward trendline going back to 2009.
SEE: Interpreting Support And Resistance Zones
The Bottom Line
The drop on Thursday, June 21 created bearish patterns in all the index ETFs. Further declines are quite likely, although there are still important support levels below that will need to be broken in order to confirm another wave to the downside. A rally is still possible, as the trend remains up from June, yet the possibility of further upside has become more remote based on Thursday's slide. A push back through the recent highs, though, could give some renewed strength to the bulls. When multiple ETFs provide the same signal, it is more reliable than only one moving in isolation. Control risk and watch the important levels, because if the market does drop, volatility will also rise.
At the time of writing, Cory Mitchell did not own shares in any of the stocks mentioned in this article.
Charts courtesy of Stockcharts.com.