Commentary: It was a volatile week on Wall Street; the markets started out strong, gave it all back and then ultimately finishing close to where they started. The week began with a bounce that carried into Wednesday before a sell off on Thursday that spilled over into Friday. After breaking down to new August lows on most of the major indexes, the markets finished the week with some late-day buying that erased most of Friday's declines. In the end, the markets did little to clear up the picture and left traders wondering whether they are close to breaking down or providing a buying opportunity.

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The S&P 500, as represented by the S&P 500 SPDRS (NYSE:SPY) ETF, remains in an interesting position in which two scenarios are developing that are at polar odds with each other. The first is the idea that a very large head-and-shoulders top has been forming over the past year and that the markets are getting ready to embark on a new down leg that could end up heading to much lower levels. This scenario would become much more plausible on a break of the July lows.

The second scenario, which is occurring on a much shorter time frame, is the idea that a tradable low is forming in this area and that the markets are simply consolidating the 2009 rally. The price action that began in late May through the present time is also taking on the shape of an inverse head and shoulders and is in direct conflict with the idea that a much larger topping pattern is close to completion. The neckline for this pattern is near $113 and a break above this level would solidify the odds that this scenario will occur. The markets could really head in either direction at this point, and traders need to be patient as the move could be explosive in either direction.

Source: StockCharts.com

The price action in the Diamonds Trust, Series 1 (NYSE:DIA) ETF, which tracks the Dow Jones Industrial Average, is presenting a very similar pattern on longer time frames, although the shorter time frames are revealing more strength. DIA set a higher high earlier this month, which was an important milestone, but the quick failure at this level is calling that accomplishment into question. DIA remained in a pattern of higher highs and higher lows over the past few weeks and only a close below the $100 level will break this pattern. This will be the first level to watch in the near term, at which point the July lows near $95 could be the bottom of a much larger base.

Source: StockCharts.com

The Powershares QQQ ETF (Nasdaq:QQQQ) actually showed a little strength this week by holding above last week's lows. This was the only one of the major index ETFs that managed this feat, and it could be giving bulls a glimmer of hope that the markets will hold these levels. It’s always a positive thing when leadership comes from the tech stocks and QQQQ has been showing relative weakness recently. The picture still looks weak overall, and QQQQ will need to clear its August high near $47 before the picture can truly turn more positive.

Source: StockCharts.com

The Russell 2000, as represented by the iShares Russell 2000 Index (NYSE:IWM), is the other index that bulls would like to see assume a leadership role. Unfortunately, IWM continues to lag the markets. IWM is the only index currently testing its mid-July pivot low near $60, although Friday's close revealed some buyers waiting at this level. Critical support remains near $58 and a break below this level will be the place where many participants will throw in the towel.

Source: StockCharts.com

The Bottom Line
The markets are truly in a position where a large move can occur in either direction. There are many mixed signals as well, making it even more difficult to get a read on price action. Traders need to remain patient and keep a watchful eye on some clearly defined levels. Just beneath current price action is a clearly defined support level that has held over the past year. Just above price action is a price level that has acted as resistance over the past two months. Clearing either of these two ranges will begin to stack the odds in a trader's favor, but until then, traders are probably better served relaxing as the summer winds down. 

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