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Broad Indices Remain Stuck in a Channel

Stocks in this article: SPY QQQQ

Equities show more buying power right now that at any time since last summer. Does this uptick mark the end of the bear market or just another false dawn ahead of even lower prices in 2009? While there's no perfect answer that big question, the weekly index charts can help us make informed decisions about this recovery effort.

I'll use exchange-traded funds in this review, rather than the indices, because they give us useful volume information that's missing in the underlying instrument. This is especially important because prior oversold bounces in this bear market printed unusually weak daily volume that indicated eventual failure and a rollover to lower prices.

SPDR Trust
Click here for larger image.
Source: eSignal

The SPDR Trust (SPY) illustrates the historic decline between October 2007 and November 2008, with the fund bouncing at 2002 support under $80 just two weeks ago. Price action since that time shows a moderate bounce with considerable week-to-week overlap. Notably, the instrument has yet to mount the November swing high at $100.86.

So, for now, S&P 500 price action is still engaged in an active downtrend noted by a continuous series of lower highs and lower lows. This will change when the index finally rallies over the last weekly high. However, the fund also shows a major resistance level between current price and that high, in the form of a declining parallel channel.

The two-month sequence of highs and lows has generated a channel, with resistance near $96.50. It's common for this type of pattern to develop in the latter stages of downtrends. In theory, it's difficult for price to break out of this formation before it grinds out at least three highs and lows. This raises the possibility of another lower low before this bear market finally ends.

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