The Major ETFs in the Week Ahead
July 09, 2012

The Week for the ETFs: A Sustainable Rally Looming?

by Ian Harvey

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July 09, 2012

Introduction

End of the week selling has taken the major ETFs off the weekly highs. The shortened trading week started out bullish for stocks as some minor resistance levels were broken, indicating a further rise in stocks. On July 6 though, that buying came to a halt, and selling eroded or completely erased all gains seen during the week.

The Major ETF Results for the Past Week

”.....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 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.....”

- The Major ETFs in the Week Ahead - July 02, 2012

As discussed in last week's market summary, there still could be upside in this market, but it is unlikely that the index ETFs will be able to create new 52-week highs. Despite the late week selling, though, the indexes are in a short-term uptrend, which could continue.

• The S&P 500 SPDRS (ARCA: SPY) exceeded the major 61.8% Fibonacci retracement resistance level at $136.58 last Monday, hitting a high of $137.80 on Thursday. The SPY gapped lower Friday, with next good support at $134.28 and the 20-day EMA.

The Dow Jones Industrial Average SPDR (ARCA: DIA) tested its 20-day EMA on Friday, reaching a low of $126.87.
The Dow Industrials Advance/Decline (A/D) line has turned lower, and failed to reach its key negative divergence resistance. It has been one of the weakest A/D lines, but is still above its WMA.

PowerShares QQQ ETF (Nasdaq: QQQ), representing the Nasdaq 100 index, broke through its downtrend from the April highs on Thursday.
The tech sector was encouraged by the ability of Apple (AAPL) to overcome resistance at $590. Apple eventually was able to close above the $600 level, and surpassed the 61.8% Fibonacci retracement resistance.
QQQ had a high last Thursday of $65.26, which was just below the 61.8% Fibonacci retracement resistance from the April high at $65.32. This is now a key level of resistance once the market again turns higher.
The Nasdaq-100 A/D line did break through its negative divergence resistance at the end of June. This is a positive sign, consistent with the end of the correction.

Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, rallied 8.5% from the June 26 lows, eventually reaching a high of $81.84 last week. The downtrend was broken at the start of July.
The Russell 2000 A/D line tested its major negative divergence resistance before turning lower. The A/D line is still in an uptrend and above its WMA. A break through this divergence resistance may signal that small-cap stocks are starting to outperform.

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The Major ETFs in the Week Ahead

Late last week saw selling erode or completely erase any gains seen from buying earlier in the week. Most of the exchange-traded funds (ETFs) finished the week below the resistance levels they recently broke, indicating false breakouts. This price action, coupled with bearish divergence in on-balance volume, will make it very difficult for the indexes to reach a new 52-week high any time soon. The trend since the start of June is higher though, and it is possible that could continue.

• So far the S&P 500 SPDRS’s (ARCA: SPY) ETF has not been able to reach the $139.75 target, though. It could still happen, but with the pullback in late week trading back below the former $136.25 resistance level; the possibility has become less likely.
The 52-week high of $142.21 is therefore unlikely to be challenged. On-balance volume (OBV) has shown a bearish divergence for some time, but now there is also a non-confirmation signal in the short-term as well. Over the last two weeks the ETF made a higher high (broke above $136.25) but on-balance volume did not.
Therefore, selling pressure is accumulating on both the long-term and short-term time frames. Minor support is at $133.40 followed by the June 25 low at $130.85. A drop below the latter is likely to result in a test of the June 4 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’s (ARCA: DIA) 52-week high is at $133.14 which is still within striking distance if a push higher continues, but the failed breakout makes it a less likely scenario than further declines. A drop back below $123.75 has bearish implications, and provides further downside targets of $120, followed by $116 if the former is breached.
Similar to the S&P 500 SPDR, there are long and short-term bearish divergences on the on-balance volume indicator. The new price high in May was not matched by a new high in the indicator, and the recent rally in late June and early July also didn't receive confirmation from the indicator. This indicates that underlying the price action selling pressure is mounting.


PowerShares QQQ ETF’s (Nasdaq: QQQ) had strong selling on July 6 which dropped the price back to well below the breakout point, meaning $66 is unlikely to be tested for some time. Minor support is below at $63. The next level to watch is $61.54, the June 28 low. 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).
On-balance volume shows the same long-term bearish divergence as the other ETFs, indicating that a new 52-week high anytime soon is highly unlikely under current conditions.


• The Russell 2000 iShares Index (ARCA: IWM) ETF, last week, saw the target of $81.50 being hit. Minor support is now at $77.50, but $74.60 is the real level to watch. If the latter level is penetrated a test of 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.
Long-term bearish divergence on the on-balance volume indicator means overall selling pressure, but short-term the indicator is moving in muted fashion higher. The short-term confirmation of the indicator means there is still some buying pressure, but likely not enough to over-come longer-term selling forces.



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Conclusion

It now appears that an important low is in place for the ETFs. The S&P 500, Dow Industrials and Russell 2000 A/D lines are acting weaker, while the Nasdaq-100 A/D line is positive.

There are risks though. Support levels should be watched closely regarding the ETFs, for if they are broken, further declines are likely. If another wave lower develops it is likely to be more volatile and severe than the decline that occurred in May.

Other Important Articles Relating to the Week Ahead

1. The Economy and Earnings in the Week Ahead – July 09, 2012

2. The Past Week Stock Market Results – July 09, 2012

3. The Week Ahead in the Stock Market – July 09, 2012


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