Stock Charts See Big Downside Risk if Indices End Lower This Week

NEW YORK (TheStreet) - The major equity averages are straddling their key weekly moving averages with mixed momentum readings. This creates a technical bull versus bear tug-of-war, and if the bears take stocks lower this week, the downside risk could be significant.

The bulls are represented by the Nasdaq Composite which ended Friday, June 12 with a close of 5,051.10 above its key weekly moving average of 5,032.88 and with a momentum reading of 80.62 -- above the overbought threshold of 80.00. Also on the bull side of the rope is the Russell 2000, which had a weekly close of 1,265.02, above its key weekly moving average of 1,251.29. The Russell ended Friday with a weekly momentum reading of 63.90, up from 60.90 on June 5.

The bears are represented by the Dow Jones Industrial Average, which had a weekly close of 17,898.84, below its key weekly moving average of 17,998.55, with a momentum reading of 63.28 -- down from 72.87 on June 5. Also on the bear side of the rope is the Standards & Poor's 500 which had a weekly close of 2,094.11, below its key weekly moving average of 2,101.73 with a momentum reading of 74.25. That's down from 81.58 on June 5, tumbling below the overbought threshold of 80.00.

The Dow Transportation Average is anchoring the bear side of the rope with a weekly close of 8,416.80, below its key weekly moving average of 5,570.01. Transports began to form the bear team at the weekly close on May 1.

Weekly momentum for the transports fell into oversold territory the week of June 5, and the current reading of 18.02 is down from 18.92 on June 5.

The transports were telling investors to "sell in May and go away," but the other averages ignored this bear's roar.

What's interesting to note is that the Nasdaq and Russell 2000 have not seen a new high since 5,119.83 set on April 27 and 1,278.63 on April 15, respectively. It's been the industrials and S&P 500 that continued to new highs, then joined the side of the bears. The Dow set its all-time intraday high of 18,351.36 on May 19 with the S&P doing so the next day at 2,134.72.

This week should determine the winning side of the tug-of-war, as investors digest housing data on Monday and Tuesday, the FOMC meeting on Wednesday and Quadruple Witching on Friday.

The bulls will be trying to pull the economically-sensitive transportation average to a weekly close above 8,570.01, while the bears try to push the Nasdaq and Russell 2000 into weekly closes below 5,032.88 and 1,251.29, respectively.

Meanwhile, the three ETFs that track the Dow 30, S&P 500 and Nasdaq are leaning toward the bearish side. Here are their weekly charts.

Here's the weekly chart for the SPDR Dow Jones Industrial Average ETF (DIA), also known as Diamonds.


Courtesy of MetaStock Xenith

Diamonds had a close of $119.13 on Friday, up 0.7% year to date, but below its key weekly moving average of $179.92. Its weekly technical momentum reading of 65.50 this week is declining below the June 5 reading of 74.25.

If Diamonds stays below key levels on technical charts at $179.33 and $180.09, the bears will likely win the tug-of-war.

These levels expire at the end of June and at the end of this week, respectively. If the bears win, the downside risk are key technical levels of $150.82 and $145.24 which do not expire until the end of 2015.

Here's the weekly chart for the SPDR S&P 500 ETF  (SPY), also known as Spiders.


Courtesy of MetaStock Xenith

Spiders had a close of $210.01 on Friday, up 2.2% year to date, but below its key weekly moving average of $210.45.

Its weekly technical momentum reading of 76.46 this week is declining below the June 5 reading of 82.66, thus falling below the overbought threshold of 80.00.

If Spiders stay below a key weekly technical level of $211.75, the bears will likely win the tug-of-war.

A close on Friday, June 19 below a lower key technical level of $205.08 will put the bears in control with downside risk to key technical levels of $158.47 and $155.56 which do not expire until the end of 2015.

Here's the weekly chart for the PowerShares QQQ Trust ETF  (QQQ).


Courtesy of MetaStock Xenith

PowerShares QQQ had a close of $108.75 on Friday up 5.9% year to date but below its key weekly moving average of $108.91. Its weekly technical momentum reading of 77.96 this week is declining from the June 5 level of 79.90.

If the QQQ's stay below a key weekly technical level of $110.69, the bears will likely win the tug-of-war. A close on Friday, June 19 below a lower key technical level of $105.64 will put the bears in control with downside risk to a key technical level of $89.24 which will not expire until the end of 2015.

Here's how to read a weekly chart. This chart shows weekly price bars going back to the beginning of 2007 and thus includes the Crash of 2008, then the current bull market for stocks that began in March 2009. The red line tracks the ups and downs of the key weekly moving average. The green line is the 200-week simple moving average. The red line that oscillates along the bottom of the chart is the momentum reading on a scale of 00.00 to 100.00. A reading below 20.00 is oversold and a reading above 80.00 is overbought.

A technically positive weekly chart occurs when a stock ends a week above its key weekly moving average with the momentum reading rising above 20.00.

A technically negative weekly chart occurs when a stock ends a week below its key weekly moving average with the momentum reading declining below 80.00.

This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.

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