The Weekly Report For August 10th - August 14th, 2009

Commentary: The markets started to show some volatility last week, despite finishing practically where they started. The volatility began with a Wednesday rally heading into the release of the Fed minutes. There was the usual back-and-forth action following the Fed statement, and in the end, the indexes finished off their highs, but were still well into positive territory. After a small move on Thursday, the markets gave back the majority of their Wednesday gains, but also finished well off their intraday lows. While there was an increase in day-to-day volatility, ultimately, the markets simply continued to consolidate and digest some of the recent rally.

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The Diamonds Trust, Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, shows a similar pattern. Intraday volatility has been expanding but overall, DIA remains in a tight two-point range between $92 and $94. Many of the candles are signaling indecision, which is typical when buyers and sellers struggle for control. If DIA were to pull back from this level, the $88 level would be an area to watch for support. This is the prior breakout area, and close to a rising 50-day moving average.

The chart for the S&P 500 SPDRS (NYSE:SPY) ETF shows this action clearly, with SPY moving in a lateral range for the past two weeks. While some of the individual candles look weak, it is impressive that SPY has not given up much of the rally as it consolidates. Notice how the 20-day moving average is rising to meet price, rather than SPY pulling back. This is typically a bullish development, as it shows buyers are waiting underneath the price action. Sellers have been stepping in near $102, so SPY remains in a very tight range, and should have a sharp move once it breaks to one side or the other. (Learn more in S&P 500 ETFs: Market Weight Vs. Equal Weight.)

The iShares Russell 2000 Index (NYSE:IWM) ETF chart is showing more of the same. While the trading range is a little wider, this is expected as IWM tracks the more volatile small caps. IWM respected a rising 20-day moving average on this week's consolidation, and continues to remain healthy. Even a pullback to the $53 area would remain constructive, as it would simply be a test of the prior breakout area.

While the Powershares QQQ ETF (Nasdaq:QQQQ) is once again diverging from its peers. While it remains in a consolidation much like its peers, it is actually heading into its third week of tight sideways trading. It also respected its rising 20-day moving average and has been showing support near $39. However, it is also showing clear selling at $40 and remains in a very tight range. Secondary support looms near the prior breakout near $37.

Bottom Line

Stepping back, the pattern that has emerged over the past two weeks is a sideways consolidation of the strong rally that began in July. While sellers are clearly becoming more aggressive, the fact that the markets have not given up much of the rally is impressive. Currently all the major indexes remain in uptrends with rising 20- and 50-day moving averages. Even the 200-day moving average is starting to pick back up. While there are no guarantees that the markets will continue to trek higher, the benefit of the doubt needs to be given to the bulls. Shorting this market continues to be a risky endeavor and will probably remain so until the markets start setting lower highs and lower lows.

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Have a Great Day! By Joey Fundora Joey Fundora is an independent trader located in South Florida. Joey focuses on using technical analysis techniques to uncover supply and demand imbalances in equities. To see more of his work, visit his site on Stock Chart Analysis. DISCLAIMER ChartAdvisor is not a registered Investment Adviser or a Broker/Dealer. The trading of securities may not be suitable for all potential users of the Service. You should be aware of the risks inherent in the stock market. Past performance does not guarantee or imply future success. You cannot assume that profits or gains will be realized. The purchase of securities discussed by the Service may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities, or making any investment decisions. You assume the entire cost and risk of any investing and/or trading you choose to undertake.