The Week for the ETFs: A Sustainable Rally Looming?
by Ian Harvey
July 02, 2012
After flashing bullish signs for several weeks, the overall market now appears ready for a more sustainable rally that could surprise the majority. Below are the signs to watch out for to confirm that stocks have begun a new intermediate term uptrend.
The Major ETF Results for the Past Week
The week ended well for stocks, as the major index ETFs all jumped higher on Friday, June 29. This means the indexes all managed to finish the week above support and are once again pushing at resistance. If the ETFs each break their respective resistance level there is likely to be additional short-covering and buying. The question is, how long can it last? By looking at indicators and price action we can attempt to determine if this is a rally within a longer-term downtrend, or if the current rally will be the start of a new uptrend.
”….. Multi-day ”bearish” engulfing patterns continue (a big down day that completely wipes out the prior up day) – however, it is possible that a further rally could develop in the week ahead….. “
“…..A rally is still possible, as the trend remains up from June, yet the possibility of further upside has become more remote based on Thursday's slide. A push back through the recent highs, though, could give some renewed strength to the bulls. When multiple ETFs provide the same signal, it is more reliable than only one moving in isolation.”
- The Week Ahead in the Stock Market - June 25, 2012
• The S&P 500 SPDRS (ARCA: SPY) closed just below the mid-June highs at $136.25, with the major 61.8% Fibonacci retracement resistance level at $136.58.
• The Dow Jones Industrial Average SPDR (ARCA: DIA) remained above the $123.50 support level the entire week, and the jump on June 29 puts it in very close proximity to a resistance level.
However, the DIA tested Tuesday’s lows at $124.25 on Thursday, before gapping sharply higher Friday. This is now the first important level of support.
The weekly and daily relative performance, or RS analysis still indicates that DIA is underperforming the S&P 500.
• PowerShares QQQ ETF (Nasdaq: QQQ), representing the Nasdaq 100 index, remains in between resistance at $64.57 (June 20 high) and support at $61.54. Prior support at $61.68 was broken during the week, but it was a false breakout as the ETF recovered on June 28 and 29.
The QQQ was hit hard on Thursday, reaching its lowest level in almost three weeks at $61.54 before turning around. This is now a pivotal level of support to watch.
There is still major resistance in the $64.50 to $64.80 area, which corresponds to the June highs. The 61.8% Fibonacci retracement resistance, calculated from the April high at $68.55, is at $65.32. A close above this level will be a good sign.
QQQ came close to the weekly Starc band in May, and is now in the middle of the bands, with the weekly Starc+ band at $67 last week.
The weekly RS line is below its WMA, and is currently in a trading range. It will require close monitoring in the next few weeks.
The weekly OBV is acting more positive, as it moved back above its WMA three weeks ago and is not far below the March highs. The OBV did confirm the recent highs, indicating that the major uptrend was intact.
The Nasdaq-100 A/D line has overcome its downtrend, but has not yet accelerated to the upside.
• Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, closed the week at $79.54, well above the mid-June highs at $79.08. This is a positive sign for the overall market.
The IWM managed to break above the pivotal $78 resistance level on June 19, but it then moved back below the resistance level. On June 29 the ETF moved back above $78 and also penetrated the recent high at$79.08. This is a positive short-term sign for the ETF.
The downtrend from the March and April highs is in the $80 area, with major resistance between $82 and $84.
The RS analysis improved sharply Friday, but does not yet indicate that the small caps are leading the S&P 500. The Russell 2000 A/D line is rising more sharply, and is now closer to its long-term downtrend.
The Major ETFs in the Week Ahead
There have been some good opportunities to buy stocks as well as exchange-traded funds - ETFs on the pullbacks over the past few weeks and this would have certainly paid off last Friday.
Thursday’s late-day reversal in stock prices was spurred primarily by nervous short covering as rumors spread over a new Euro debt deal. Stocks are sharply higher in early trading Friday in reaction to the overnight agreement to provide capitalization directly to the banks.
A solidly higher close Friday, the last trading day of the month and quarter, further improved the technical outlook, particularly for ETFs. At the early June lows, there were signs that fewer sellers were pushing prices lower. Over the past several weeks, the market’s ability to rebound repeatedly from early selling was also a sign of strength.
The bullish signs from the market internals in early June shifted the focus to the long side of the market and the Advance/Decline (A/D) lines are now closer to giving strong intermediate-term buy signals for stocks and ETFs. This could mean a dramatic stock rally that could last until the end of the year, which is a pattern we have seen in past election-year markets.
• The S&P 500 SPDRS’s (ARCA: SPY) A move above $136.25, with the major 61.8% Fibonacci retracement resistance level at $136.58, could spark additional buying interest. The next upside target, if this occurs, is $139.75. This would bring the ETF near the 52-week high of $142.21, but it will be hard for the ETF to climb back above it.
However, the weekly chart shows that the 127.2% retracement target from the recent decline would take the SPY back to $146.50.
Over the longer-term the RSI was showing a bearish divergence, which indicates a trend reversal, and an unlikely rise back through the 52-week high. On the flip side, the indicator has recovered aggressively and has shown a slight positive divergence at the recent lows. This confirms the current short-term move higher. The weekly on-balance volume (OBV) is back above its WMA, and a move above the resistance would be a bullish sign.
There is initial weekly support at last week’s low of $130.85, with a drop below likely to result in a test of the low at $127.14 (unadjusted). If that low is breached, the next downside target is at $126, followed by $122 (if we move below $126).
• The Dow Jones Industrial Average SPDR (ARCA: DIA) trend for June has been higher, and if the ETF continues to push through resistance at $128.71 (June 19 high), as it has already surpassed the 61.8% retracement at $128.17, the rally is likely to continue for at least a bit longer.
There is further chart resistance in the $129.60 to $130.30 area.
The 52-week high is at $133.14 and is within striking distance if the resistance level is over-taken. A drop back below $123.75 has bearish implications, and provides further downside targets of $120, followed by $116 if the former is breached.
Once again this ETF has shown a longer-term bearish divergence on the RSI, but recently the indicator has recovered and shown a slight positive divergence at recent lows. Therefore, the current short-term rally is confirmed, but there still remains downside risk as the longer-term form forces play out.
• PowerShares QQQ ETF’s (Nasdaq: QQQ) If the ETF can rally above $64.57, the next resistance level (and upside price target) is $66. From the middle of March to the beginning of May, $66 to $68 was a high traffic area. The area is therefore likely to act as resistance.
A drop below $61.50 could trigger selling into support. Support is at $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). The RSI tells the same story it did with the ETFs discussed prior - a longer-term bearish divergence, but recent indicator strength means we could see further upside before selling continues.
• The Russell 2000 iShares Index (ARCA: IWM) ETF, now has good support in the $75.40 to $77.20 area.
The target for the current move higher is $81.50. A drop back below $74.60 indicates more selling, and that a move below the June 4 low at $72.94 is likely. If that materializes, the next downside target is $71, followed shortly by $70, which is right in the vicinity of the long-term upward trendline going back to 2009.
The longer-term bearish divergence on the RSI indicates that $82 to $84 will be strong resistance, and the ETF has a low probability of being able to get through it in the near-term. Short-term positive RSI confirmation indicates this current rally could go a little further though.
Each of the index ETFs is showing short-term positive signs, helped out by the big push higher in early trading Friday, June 29. With the ETFs being able to push through their respective resistance levels is a short-term positive signal, and the RSI indicator is confirming this could occur. The 52-week highs will still be hard to reach, though, which means this rally is more likely a correction higher in what will be a longer-term downtrend. Of course if all the ETFs continue to move higher and break through the 52-week highs, this would change the outlook, and point to another wave higher.
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