Commentary: As last week was filled with a few wild swings, the markets decided to take a break and go nowhere this week. Three out of the five days were met with a stand still between the bulls and bears, and the other two days basically canceled each other out. In the end, the major indexes finished the week almost exactly where they began. The indexes are still precariously perched just beneath their recent highs while building steam for a larger move. The key question is: to what side will the break move?
The S&P500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, has continued to consolidate the late October run up and has refused to give up much ground. While the recent attempts to clear resistance have failed, the fact that SPY is not retracing deeper is bullish. This sideways range has been expected, with the emotional low put into place in late November, and the stiff resistance overhead. Both of these levels continue to be the lines in the sand for both bulls and bears to watch.
The Diamonds Trust, Series 1 (NYSE:DIA) ETF is in much the same position as SPY except it did manage to gain on the week. In fact, it closed very near its recovery highs and could attempt a breakout next week. With the transports performing well this week, a move higher by DIA could have these two averages moving higher in unison, which is bullish according to the Dow theory. (For a refresher on this subject, check out Intro To Dow Theory.)
The small caps, as represented the iShares Russell 2000 Index (NYSE:IWM) ETF, are starting to consolidate in a tight range, possibly leading up to a strong move to either direction. One interesting clue provided by IWM this week was the ability to close all five days above its 20- and 50-day moving averages. This is a decent show of strength, especially after spending several weeks below these averages. The recent highs are key, as a move above them could trigger some short covering and possibly buyers in a seasonally positive period for this group.
The Powershares QQQ ETF (Nasdaq:QQQQ also finished the week near unchanged, although the Friday session was marked with a failure near the recent highs. Apple, Inc.(Nasdaq:AAPL) has been under selling pressure for the past couple of weeks, and weighing down on this average. QQQQ remains in a consolidation much like the other market ETFs, also holding above its 20- and 50-day moving averages. These averages would be the first level to watch, with the recent highs and lows as the areas to watch for confirmation of a larger move.
This was a challenging week for shorter-term traders as there were several days with very little movement. The market is digesting the recent move, and should make a move to one direction soon. With options expiration approaching next week, it's possible the next large move will take place as soon as the next few days. As traders, sometimes the best move we can make is to sit on our hands and wait for a clearer signal to emerge. This could very well be one of those times, as there are conflicting signals just as the market is getting ready for a large move. The key levels to watch are clearly defined, and remain where traders should be focusing most of their attention. Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!