Wednesday, March 18, 2009

Key Price Levels: March 19, 2009

Four weeks ago, the breaks of key support levels led to accelerated selling. These old support levels become new resistance, and for the most part that is where we find prices on the major indices--butting up against these resistance levels.

Please review the methodology and the significance of the key price levels by clicking on this link.

A weekly cart of the S&P Depository Receipts (symbol: SPY) is shown in figure 1. 4 weeks ago, SPY broke below the key support level at 81.17 and essentially fell out of the channel (down red arrows). As expected, prices dropped rapidly, and lower prices brought out more bears. With sentiment too bearish, the markets reversed strongly. While prices are above the 2008 lows (horizontal pink line), we have yet to re-enter the channel. In other words, prices are back to their breakdown levels. With the market overbought, I could make a serious argument that this bounce is nothing more than a retracement back into resistance. However, this bearish outlook has to be tempered by the bullish sentiment picture. As of this past week, investors remain bearish and on the sidelines and the "smart money" is bullish. There should be support for buying the dips.

Figure 1. SPY/ weekly

A weekly chart of the Diamond Trusts (symbol: DIA) is shown in figure 2. The DIA have yet to close above the November, 2008 lows at 74.50 (horizontal pink line). This is not channel resistance nor is it key level resistance. This is just the November lows, which are significant.

Figure 2. DIA/ weekly

Figure 3 is a weekly chart of the Power Shares QQQ Trust (symbol: QQQQ). The QQQQ is our "best" performer as it still remains within the trend channel, and prices remain above the 2002 lows. The close below the key support level at 27.63 should have led to accelerated selling, but as we know, sentiment became too bearish. The reversal back above this level is significant, in my opinion, and prices are now back to resistance at 29.72. A weekly close above this level would also be a breakout from the upper channel line.

Figure 3. QQQQ/ weekly

Figure 4 is a weekly chart of the i-Shares Russell 2000 Index (symbol: IWM). This is a similar scenario to the SPY and DIA. There was a break below key support levels (red down arrows on chart) and prices fell out of the channel. The bounce brought prices back above November, 2008 lows (pink horizontal line), but they are now butting up against old support levels.

Figure 4. IWM/ weekly

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