Week Ahead: ETFs Approaching Resistance -- Crucial Levels to Watch!
By Ian Harvey
The Major Exchange-Traded Funds Results for the Past Week
”….. June 01 finished off the week by piercing some important levels in the following Exchange-Traded Funds. With support unable to hold, it looks as if the momentum is still continuing to the downside. There is support below, and for longer-term traders there is some solace in the fact that all these ETFs are still in long-term uptrend’s.....even though the short-term trend is down. As long as these ETFs remain below the resistance levels mentioned, the bears have control and the longs are at greater risk.”
- The Week Ahead in the Stock Market, June 04, 2012
The major index Exchange-Traded Funds - ETFs - managed to recoup some losses last week, yet still remain within a short-term downtrend. While the week's action was mostly to the upside, for the most part, these ETFs could not climb above last week's high - resistance – as mentioned last week in the excerpt above.
Pushing through that resistance level is required if these markets are going to continue to recover. Failure to break resistance, and if certain support levels below are once again tested, these ETFs could see further declines in the coming weeks.
After breaking their 38.2% support levels, the selling in the major averages has not been as heavy as expected. This, combined with the improvement in the market internals, suggests we may not test the 50% retracement support levels.
• The S&P 500 SPDRS (ARCA: SPY) hit a low of $127.14 early Monday, but traded as high as $133.53 last Thursday. This was a bounce of 5% from the lows.
There is key short-term resistance now at $133.93. A move above this level is the first step in starting a new uptrend, and it could signal a rally back to former support, now resistance, in the $137 to $138 area.
There is first good support now in the $130.40 to $130.50 area, and then at the gap between $129.70 and $130. Additional support waits at last Monday’s close of $128.10.
The lower lows in prices were not confirmed by the S&P 500 Advance/Decline (A/D) line , as it formed a bullish divergence by not making new lows. A move in the A/D line above the intervening peak will confirm the divergence.
The A/D line did move above its still-declining Weighed Moving Average (WMA) on Friday. The A/D line needs to overcome the downtrend to signal that a new intermediate-term uptrend is underway.
A Weighed Moving Average (WMA) emphasizes the importance of the most recent price. It is used to compliment the common moving average.
Moving averages are considered to be one of the basic and most important indicators in technical analysis.
The common problem with moving averages is the lag between price movements and a moving average's trend. The longer the bar period is that you select, the smoother is the moving average and the better is the filtration of volatile price spikes.
However, the longer the bar period setting -- the greater will be the lag and the later your signals will be generated.
Different methods have been created to reduce the lag by keeping the smoothing at desirable level. One of the methods to reduce lag is to use a weighted moving average that uses a weighted coefficient for each price period (price bar) that is used in the calculation.
A Weighed Moving Average (WMA) is calculated by the following formula:
WMA(N) = the Weighted Moving Average over N price-bars.
N = the bar period setting (number of bars used in calculation)
P0 = the price of the last bar
P1 = the price of the previous bar
PN = the price of the last bar in the sequence
(1 + 2 + 3 + ... + N) could be calculated by using following simpler formula:
(1 + 2 + 3 + ... + N) = N*(N+1)/2
Weighted Moving averages are used in the same way as are the Simple Moving Average (SMA) and the Exponential Moving Average (EMA). If the price rises above the WMA, the price trend is considered to be bullish and when the price falls below the WMA, the price trend is considered to be bearish. In a similar way, two WMAs with different bar period settings could be used to define a trend as well as generate signals.
• The Dow Jones Industrial Average SPDR (ARCA: DIA) also clawed back some prior losses last week.
However, the DIA was hit harder on the last decline, coming very close to the $120 level before prices turned around. So far, it has held above the more important 50% support level at $118.56.
The Dow Industrials’ A/D line formed a negative divergence at the May 1 highs, and did make marginal new lows last week even though the support from last fall held. The A/D line needs to overcome the bearish divergence resistance to signal a new uptrend.
There is further resistance for DIA now at $125.80, and then in the $126.20 to $126.50 area. There is first good support and the still-rising 200-day MA in the $122.60 area.
• PowerShares QQQ ETF (Nasdaq: QQQ), representing the Nasdaq 100 index, also looks like it will be continuing to the downside. On June 1, the ETF moved below the May 18 low at $60.76.
Monday’s low of $60.04 came very close to the 200-day MA. The 38.2% support was violated on May 17. So far, QQQ has held well above the 50% Fibonacci retracement support at $59.22.
Last Thursday, QQQ came close to next strong resistance at $63.50, which also corresponds to its former long-term uptrend.
Regaining this uptrend would be an encouraging sign. There is additional resistance at $65.60 and the downtrend from the April-May highs.
The Nasdaq-100 Advance/Decline (A/D) line did make convincing new lows on Monday, but did manage to close the week above its WMA. The downtrend must be overcome to signal that the uptrend in QQQ has resumed.
• Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, also bounced last week, but was unable to climb back above the pivotal $78 level.
The Russell 2000 Index came close to its 50% retracement support at $72.30 on Monday, reaching a low of $72.94.
The A/D line also made convincing new lows last week and is well below the major resistance line. It is likely to bottom after the other major averages.
There is now first support for IWM in the $74.50 area.
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The Major ETFs in the Week Ahead
Despite some early selling, stocks held up well on Friday, as the major ETFs averages closed near the day’s highs. If the positive divergences in the Advance/Decline (A/D) lines can be confirmed in the next few days, it will further improve the outlook. If not, we are likely to see some backing and filling before stocks complete the bottoming process.
• The S&P 500 SPDRS (ARCA: SPY) ETFs resistance is now at $134, and a move above that level would negate some of the bearishness and could even trigger a bear trap rally. Further resistance is at $136 and $140, the latter of which is the target if we break back above $134. A drop below $129.50, on the other hand, is bearish and likely to result in a test of the recent low at $127.14. If that low is breached, the next downside target is at $126, followed by $122 (if we move below $126).
• If the Dow Jones Industrial Average SPDR (ARCA: DIA) can climb back above $126, it could bring in additional buying. Additional resistance is at $128 and $131.50. A drop back below $122 has bearish implications, and provides further downside targets of $120, followed by $116 if the former is breached.
• PowerShares QQQ ETFs (Nasdaq: QQQ) resistance is at $63.15, and momentarily the ETF managed to move above this ($63.18) on June 7, but was quickly reversed. Therefore, this area still poses a hurdle the ETF must overcome if it is to continue moving higher. If a legitimate break above $63.18 occurs, the target, and next major resistance level, is $66.
Support is $60 followed by $59. The $59 mark is important because it was a resistance area back in October and November, and should now support declines. If it does not, it is a longer-term bearish signal. The next target would be at $56, should $59 be breached in the coming week(s).
• Russell 2000 iShares Index (ARCA: IWM) ETFs drop back below $74.60 indicates continued selling and would be confirmed by a move below the recent low at $72.94. If this occurs, the next downside target is $71, followed shortly by $70, which are right in the vicinity of the long-term upward trendline going back to 2009. At this time, the short-term trend is down and that looks like it will continue. This ETF will need to get back above $78 in order to renew the hopes of the bulls. $78 is strong resistance; that was proven again on June 7, as the ETF made an intra-day high at $77.72 before declining. Until that resistance level is broken, being short is likely preferable to being long. Further resistance is at $80 and $81.
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Conclusion for ETFs
With the ETFs approaching resistance last week, this will be the crucial level to watch in the week ahead. How each ETF reacts around their respective resistance level provides insight into the longer-term direction of the ETF. Failure to break through resistance means support is likely to be tested, and if breached it is likely to send the ETFs lower. On the other hand, a break through resistance is likely to trigger buying interest and short-covering. The major support levels, broken in prior weeks, indicate these rallies are "bear-market rallies" and that means caution is still warranted when buying. Always use risk controls no matter which side of the market you are on.