The Weekly Report For October 19th - October 23rd, 2009

Commentary: The markets were able to decisively clear resistance and build on the current rally this week. While Monday and Tuesday ended as indecisive narrow range days, Wednesday brought a gap higher in the markets following an upbeat earnings report from Intel Corp. (Nasdaq:INTC) and JPMorgan Chase (NYSE:JPM). The markets were able to hold most of the gains for the week despite a negative close on Friday. With the markets firmly above prior resistance, it appears a new leg higher has begun. The prior resistance area should act as support on a pullback to test these levels.

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In looking at the chart for the S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, prior resistance was near $107.35, which was actually tested on Tuesday. This is a key level; a failure to hold this area will signify a failed breakout and continued range-bound consolidation. The level to watch for a larger reversal would be the September low near $102. (For further reading, check out The Anatomy Of Trading Breakouts.)

Source: StockCharts.com

The Diamonds Trust Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, is also clearly above prior resistance. The resistance area was holding back prior rally attempts near $98, and DIA ended up trading in a base that resembled an ascending triangle. The measured move for this breakout is taken by measuring the move from the lower portion of the pattern to the top and then projecting a move of this magnitude from the breakout area. This would suggest DIA rallying toward the $104 area.

Source: StockCharts.com

In a very interesting development, the iShares Russell 2000 Index (NYSE:IWM) ETF, which tracks 2,000 companies, is showing a divergence from its larger cap peers. IWM has yet to decisively clear resistance near $62.30. This is interesting because IWM captures a larger sample of stocks and shows weakness in a key group. A breakdown in IWM from this level would be a sign of market weakness and will likely translate to breakout failure from the other groups.

Source: StockCharts.com

The Powershares QQQ ETF (Nasdaq:QQQQ) lies somewhere between SPY and IWM. On the one hand, QQQQ has been able to clear resistance and has held above this level for a few days. However, it hasn’t been able to distance itself from this area, and the longer it hangs around, the more likely a failure becomes. At this point, it is still a breakout, just not a strong one. With earnings on tap from Apple Inc. (Nasdaq:AAPL) come Monday, it is likely that we will know fairly quickly which way this ETF is headed.

Source: StockCharts.com

Bottom Line
It’s interesting that the market has left enough doubt in the current breakout to offer key arguments for both sides. Currently, the technical picture is pointing higher, as most of the indexes are trading near new recovery highs. There are clear levels of support underneath most averages and stocks, and these are the levels that should be watched moving forward. With earnings season in full gear, expect the volatility to increase from day to day, so it remains important to focus on these levels rather than getting caught up in the day's emotions.

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Shipping Group Staying Afloat

Shipping Group Staying Afloat

Commentary: The 200-day moving average is commonly used as the defining line between a bull stock and a bear stock. One of the reasons behind this is that the 200-day moving average encompasses a full year's worth of trading. One common rule of thumb used by traders is to trade stocks above their 200-day moving averages to the long side, and to sell or avoid stocks on the other side of the average. Typically, the 200-day moving average will act as support once a stock is able to trade above it long enough to cause it to slope upward. IN PICTURES: Eight Ways To Survive A Market Downturn In reviewing some sectors, I noticed that shippers are on the verge of making a decisive move above their 200-day moving averages. Many of these stocks have been vacillating above and below this average, as they continue to consolidate in a sideways pattern. Shipping stocks were looking strong in a weak market yesterday, and are toward the upper ranges of some resistance levels they have established over the past few months. If they can clear those levels, it could lead to an important bottom, and ultimately higher prices. (For more, check out Support And Resistance Reversals.) Excel Maritime Carriers (NYSE:EXM) for instance, is trading in a large symmetrical triangle, with the EXM hugging a cluster of the 20, 50, and 200-day moving averages. If EXM can clear this base, it should signal a test of the June high. One key level to watch is the bottom of the base near $6 and $5.50. Failure below these levels would be ominous for this stock. (For related reading, check out Trading Failed Breaks.) Source: StockCharts.com Genco Shipping (NYSE:GNK) is another shipper trading in a symmetrical triangle. There is a clear trendline connecting the recent peaks, and it appears that GNK is testing this resistance area. The measured target for this breakout would place GNK near $32 a share, so this is definitely worth keeping an eye on. The level to watch on the downside is right around the rising 200-day moving average. This level has been acting as support, so a failure here would be a bearish development. Source: StockCharts.com Diana Shipping (NYSE:DSX) is showing a different type of consolidation, but the general thesis remains the same. It has been consolidating above its 200-day moving average, and is close to testing a resistance level above the base it has been building. There is still overhead resistance near $19, but a break above $15 could lead to a test of this level fairly quickly. This in itself would represent a move of more than 20%. Source: StockCharts.com Eagle Bulk Shipping (Nasdaq:EGLE) is a shipper with a chart that closely resembles that of DSX. DSX has been trading in a descending channel over the past few months, after a sharp move higher and an equally sharp move lower in April though July. This consolidation appears constructive, and a move above the descending trendline marking the recent peaks could lead to a test of the April highs. Currently, GNK is already starting to clear this level, and could be in the process of a breakout. Source: StockCharts.com Bottom Line Many of these shippers had a violent move off the lows they hit in March. Of all the sectors, this may have been the hardest hit at a time when investors were fearing the second coming of the Great Depression. Without debating what stage of an economic recovery we are in, the chart patterns are holding much promise for this group. This group is also capable of violent moves in both directions, so while it is definitely a group worth watching for the upside potential, traders must also adhere to strict money management rules. With a little followthrough, this group may make an assault on its April highs. Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!