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Will Stocks Retest the Recent Lows or Continue Higher?

After a powerful rally earlier this week, stocks are rolling over again. Here's what's next for the SPY and QQQ exchange-traded funds.

We had a record decline on Friday, before a record rally on Monday. That action has been followed by wild moves throughout the week, as the volatility index, or VIX, remains elevated.

Because the VIX stubbornly remains so high, the moves in the broader indexes are erratic and often unexplainable. That is just what comes with the territory. It has left investors in a state of shock, as the S&P 500 went from a 52-week high to a 52-week low in just 10 trading sessions.

The move has been unprecedented, as machine-driven trading and news is reported faster than ever. On the one hand, investors don’t want to miss the potentially large rally back to former highs, should the coronavirus scare blow over. On the other hand, they don’t want to get steamrolled should the situation become darker and equities fall further.

With that in mind, let’s look at a few charts of the broader market.

Trading the S&P 500

Daily chart of the SPY ETF.

Daily chart of the SPY ETF.

To trade the S&P 500, I’m using the SPDR S&P 500 ETF  (SPY) - Get SPDR S&P 500 ETF Trust Report. Currently, the SPY is sitting right on its 200-day moving average and just above the major fourth-quarter breakout level at $300.

Before Thursday’s action and following a 4.2% surge on Wednesday, the SPY looked like it was going to put in a “V-shaped” bottom, which is classified as a dramatic fall that reverses higher with a similarly dramatic climb. We saw such action in December 2018.

With Thursday’s pullback, investors have to be open to the idea that the SPY, as well as other major stocks and indexes, could retest the lows from February. For the SPY specifically, that theory becomes closer to reality should it lose the $300 mark. Below puts the $297.50 area on watch, as well as $295.

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Admittedly, that’s a rather tight range given that the VIX is over $35 at the moment. But should the SPY lose $295, it puts $285 back on the table.

If $300 and the 200-day moving average hold as support, then investors can continue looking for higher prices. Over $309.50 puts the $315 level and 100-day moving average on the table. These marks so far have been resistance. Over them puts the 50-day moving average on the table.

Trading the Nasdaq

Daily chart of the QQQ ETF. 

Daily chart of the QQQ ETF. 

For the Nasdaq, I’m looking at the PowerShares QQQ ETF  (QQQ) - Get Invesco QQQ Trust Report. Keep it mind, Apple  (AAPL) - Get Apple Inc. (AAPL) Report, Microsoft  (MSFT) - Get Microsoft Corporation (MSFT) Report and Amazon  (AMZN) - Get, Inc. Report make up its three largest holdings. So big moves in the QQQ can drive these stocks, and vice versa.

The technicals for the QQQ are a bit cleaner. First, the 200-day moving average held incredibly well for the ETF, triggering a large rebound from the lows.

Shares are now narrowing in a tightening range, setting up for a potentially large break in either direction. On the downside, see if the 100-day moving average gives way. If it does, the $205 level is on the table, followed by the 200-day moving average and fourth-quarter breakout level at $195.

On the upside, look for a move up to the 50-day moving average. Over it puts a gap-fill up to $230 on the table.

No matter what though - for both the SPY and QQQ - investors need to use caution. No one knows what’s next or how the markets will respond. What we do know is that when the VIX is between $30 to $35-plus, traders need to use caution, discipline and trade with smaller position sizes, if they opt to trade at all. 

Amazon, Apple and Microsoft are holdings in Jim Cramer's Action Alerts PLUS member club. Want to be alerted before Jim Cramer buys or sells AMZN, AAPL or MSFT? Learn more now.