The markets kicked off the New Year with higher prices, although they
were accompanied with an increase in volatility. Monday brought a
strong gap higher that lifted many stocks, but the rest of the week
was peppered with false moves in both directions. Beyond that, each of
the different market indexes took different directions as the small
caps were hit with some profit-taking while tech stocks finished
higher. In the end, the markets did finish higher across the board
despite the increased volatility.
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The S&P 500, as represented by the *S&P 500 SPDRS* (NYSE:SPY) ETF, led
the charge earlier in the week on the heels of a strong move in the
financials. However, the financials then came under pressure on Friday
and were one of the weakest sectors of the day. There was an increase
in volatility as witnessed by the long lower shadows on several
candles this week, which revealed wide intraday moves. The $126 level
was tested a few times, making it the first level to watch for
near-term traders. A drop below this level could signify more
consolidation ahead. However, the key level to watch remains just
above $130. This was an important pivot high in 2008 and the breakdown
from this level precipitated the worst part of the recent bear market.
While the *Powershares QQQ ETF* (Nasdaq:QQQQ), which represents the
Nasdaq 100, also experienced some volatility, it did manage to surge
to new several-year highs. In fact, QQQQ has actually cleared the
highest level from the last bull market. This is an impressive leading
divergence from the rest of the indexes and could suggest that tech
stocks are becoming a new leader. The $55 level, which had been
acting as a ceiling through December before being cleared this week,
held on a few pullbacks. This is the first level to watch; also keep
an eye on the $54 level for support on a pullback.
Much like SPY, the *Diamonds Trust Series 1* (NYSE:DIA) is also close
to testing a key high from 2008. For DIA, $118.73 was an important
high and should have traders on guard; there's a chance DIA could
trade there soon. DIA continued to press higher, although it too
showed an increase in volatility. However, DIA did defend its gap this
week and should have some support near $115. But can it muster up the
strength to power through $119?
The *iShares Russell 2000 Index* (NYSE:IWM) ETF showed the most
weakness this week. It has been leading the charge higher along with
QQQQ, so perhaps some profit-taking was in order. However, traders
should also be on guard for a possible rotation away from riskier
stocks to safer stocks. The selling in IWM came on increased volume so
traders should be cautious in the near future. Buyers stepped in to
defend the $78 level, so this is the first level to watch. Looking
above, a move above $80 could signal a resumption of the uptrend.
*Bottom Line*
It's been commonly held that the markets usually finish the year in
the same direction as the first week of trading. Despite the
volatility, the markets did close out the week higher and the benefit
of the doubt remains with the bulls. The Nasdaq 100 is at almost a
10-year high and is above its prior bull market highs, which is really
quite surprising considering the extent of the recent bear market.
However, traders need to be cautious as the markets are becoming
overheated as the S&P 500 approaches a key level. Although the trend
has remained higher, the market is becoming increasingly susceptible
to a correction. If this correction occurs, it is likely to be swift,
so traders should remain cautious moving forward.
Source: Investopedia.Com
