Major Indexes Risk Bearish Patterns

Includes: DIA, QQQ, SPY
by: optionMONSTER

By Bryan McCormick

All of our technical levels changed Friday by the close, bringing the indexes up toward the most recent price peak at the highs of the previous week.

Earlier this morning the U.S. futures were much higher but have since pulled back. This was in part caused by a sudden and sharp slip in Europe and the U.K. into, or toward, the red zone.

Although it might not seem like it, our markets have been rallying in the extreme short-term for the last week, though not very strongly. On the charts of the indexes, there is the potential for last week's price action to look distinctly like bearish "flag" formations.

Why does this matter? If the markets stop rallying, the risk is that these patterns will trigger. It is important to remember that formations of this type--pole-flag-pole shapes--generally have very sharp moves as reflected by the poles framing the flag. For the bulls, that is a big risk.

For the bears, of course, the opposite is true. If these flags don't trigger, they lose a technical catalyst for being sellers. Moreover, as we have seen several times throughout earnings season, when patterns fail they tend to exhibit very sharp price movements too in the opposite of the anticipated direction.

One other technical condition is worth noting: While markets did rally last week, they also managed to work off a very short-term oversold condition without going anywhere on the upside.

Generally speaking, that is a condition of technical weakness. Whether the bears can exploit this remains an open question.

On the macro side there is a new worry this morning, one that has not been present for a long time. The U.K. experienced a sharp spike in inflation today.

Although this was quickly dismissed as a one-time phenomenon, many traders will be intensely focused on this issue because rampant inflation has been viewed as a possible consequence of the massive coordinated global fiscal stimulus. The debate will begin as to whether that moment has arrived.

Nasdaq 100 (NDX)

First support is at 1759.46. First resistance is now at 1787.89.

For the Nasdaq 100 Index Tracking Stock (QQQQ) first support is at $43.26. First resistance is at $43.97.

S&P 500 (SPX)

First support is now at 1060.59. First resistance is at 1080.04.

For the Standard & Poor's Depository Receipts (NYSEARCA:SPY) first support is at $106.25. First resistance is at $108.25.

Russell 2000 (RUT)

First support is now at 600.47. First resistance is now at 610.63.

For the iShares Trust Russell 2000 Index Fund (NYSEARCA:IWM) first support is at $60. First resistance is at $61.63.