Tickers in this Article: SPY, DIA, QQQ, IWN
The United States markets edged higher this week, helped by Friday's quadruple witching, and despite a brief sell-off mid-week due to weak economic data. In the U.S., jobless claims unexpectedly rose to 382,000, while manufacturing in the Philadelphia region shrank for the fifth straight month in September. Looking ahead, a composite reading of U.S. leading indicators also showed a 0.1% downturn, which was worse than economist expectations of an even (0%) reading.

In the eurozone, manufacturing and services data came in weaker than expected. Markit's Purchasing Managers' Index (PMI), a gauge of business activity, fell to 45.9 in September, which was the lowest rating in over three years. Analysts believe that the region's economy is shrinking at a faster rate than the 0.2% quarterly decline seen during the second quarter of this year. While many traders are watching for an ECB rate cut to help the market next month, the increased tension in the region has led to higher bond yields and hurt stocks this week.

SEE: Economic Indicators: Purchasing Managers Index

The S&P 500's SPDR (ARCA:SPY) ETF ended the week roughly where it started, but remained above the support levels created by an ascending triangle breakout earlier this month. With the relative strength index (RSI) and moving average convergence-divergence (MACD) at high points, traders are watching for a retracement to those support levels at around $143.50 before a significant move higher, particularly as volume has weakened following the breakout.

SEE: Momentum And The Relative Strength Index



The Dow Jones Industrial Average SPDR (ARCA:DIA) exchange traded fund (ETF) moved higher this week and remains in a similar position after its own breakout from an ascending triangle pattern. But again, many traders are looking for a pullback next week, with both the RSI and MACD indicators at relative highs. That said, the ETF continues to trade with a minor support at roughly its current price. Traders with bullish bets may want to keep tight stops, while those looking to take a position may want to wait for a retracement to around $133.



The PowerShares QQQ (Nasdaq:QQQ) ETF made new highs this week as Apple released its new iPhone 5, but the index showed signs of a topping towards the end of the week with the appearance of a doji star candlestick pattern. Traders looking to initiate a position may want to wait for a retracement to prior support levels of around $68.50, particularly with volume weakening towards the end of the week, while those with existing long positions may want to consider taking some money off the table at these levels.

The iShares Russell 2000 Index (ARCA:IWN) ETF ended the week roughly even, remaining well above a key support level at around $82 created by an ascending triangle breakout earlier this month. As with other equity indexes mentioned here, the high RSI and MACD readings suggests that the index could see a pullback over the near-term. Traders looking to initiate a position may therefore want to look at the $82 level, while those with existing positions may want to consider taking some money off the table as well.

SEE: Interpreting Support And Resistance Zones

The Bottom Line
Equity indexes appear to be largely overbought at current levels, with high RSI and MACD readings across the board. From a fundamental standpoint, this may have been caused by the U.S. Federal Reserve's quantitative easing program (QE3) announced last week, which led to a sharp jump in stock prices. Unfortunately, the effects of this program could take time to materialize, while the eurozone's optimism also appears to be fading. As a result, traders may want to consider taking some profit and keeping tight stops on their existing positions.

Charts courtesy of StockCharts.com.

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

comments powered by Disqus
Trading Center