November 2, 2009: The S&P 500, Russell 2000 and NASDAQ 100 broke their up trend lines, but the Dow still continues to respect its trend. Are we due for a deep correction?
Let us look at the SPY, QQQQ, IWM and DIA the exchange traded funds (ETFs) that track the four major indexes. The reason we use the ETFs instead of the indices is that they are traded. As we had predicted in an earlier report ( Markets at key resistance areas) prices turned when markets hit resistance we had identified. Now with the up trend lines broken the current rally may be weakening. However, DIA also needs to weaken for the bears to win.
Let us take a look at the SPY chart below. Last week prices closed below the up trend white line shown on the chart and so far prices are trading below the trend line. Note that the prices fell from a strong area of resistance, which is the gap on the SPY shown by the blue ellipse on the chart. However, for a further fall in the SPY prices need to fall below the $101.75 area, which is support.
QQQQ also broke its uptrend line last week. Just like the SPY the Qs have to clear the support area at the $40.50 area to go lower. IWM too has broken its up trend line and is much weaker than the other ETFs. Remember IWM was leader in the current rally and is now the leader to the down side. Also just like the SPY, IWM too has fallen from a powerful gap resistance area, show by the blue ellipse on the chart.
Finally, let’s take a look at DIA, which has not yet broken it’s up trend line. Unless the DIA breaks it’s up trend line a deep correction in the markets is doubtful. It’s very possible for DIA to rally from its up trend line and take the other ETFs up with it. DIA may move up and close the gap at the $103.25 area, before a significant correction in the market.
We think a correction is due as SPY, IWM and QQQQ broke their up trend. However, if DIA moves above the gap area and the other three ETFs break above their October 2009 highs, the markets can move higher.
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