The Major ETFs in the Week Ahead
July 23, 2012

The ETFs: Support is Important for a Continued Rally!

by Ian Harvey


July 23, 2012

Introduction Stocks rallied through the middle of the week, but pulled back towards the end. The major exchange-traded funds have edged higher through June and July, but volume continues to be an element of concern.

Since the indexes put in a bottom in early June, this rally has been met with significant declining volume. The declining volume signifies little buying interest on this rise, and that it is more likely a bear market rally as opposed to the next wave higher in a longer term bull market.

Also, the indexes met with resistance last week, near the highs seen earlier in the month. This indicates we may be in for at least another short-term decline over the next week or two. The wrench in this outlook is that the June and July trend is higher; a continued push above resistance in the week ahead opens the door to a bit more upside.

The Outlook for the Major ETFs

• The S&P 500 SPDRS (ARCA: SPY), last week managed to put in a new intra-day high for the month, edging out the July 3 high at $137.51. That was a positive sign, but selling quickly re-entered as the exchange-traded fund opened back below that point on Friday, July 20. However, SPY was still up 0.77% for the week, with next support in the $135.30 to $135.60 area and the still rising 20 day EMA – with additional support at $134-$134.50 – and with key support at $132.60 which was the low on July 12th.

The S&P 500 Advance/Decline (A/D) line is now showing more signs of weakness. While the SPY made higher highs on Thursday, the A/D line made lower lows (see arrow). It is still barely above the WMA, but a drop below the July lows (see circle) would turn the A/D line back to neutral.

There is next resistance now at $137.70, and then further levels in the $138 to $138.50 area. The 78.6% 'Fibonacci Retracement’ level at $138.99 is the major level to watch.

If the ETF pushes higher in the week ahead, the target is $139.75; beyond that it is unlikely to reach the 52-week high of $142.21. Declining volume will make it hard for a significant push higher to occur. Also, through the June and July rally the ETF could only marginally break through former highs, before quickly retreating. If this was a full-fledged rally we should be seeing more enthusiasm on the pushes above former highs.

• The Dow Jones Industrial Average SPDR (ARCA: DIA), another of the major ETFs, also managed to create a new monthly high last week. That keeps the June and July uptrend alive for the moment.

However, the DIA gapped lower Friday, closing down over 1%. The next support sits at the 20-day EMA at $127.32. Then, there is additional support at $126 and more important levels at $125 (line b).

This ETFs A/D line has dropped back below its WMA, having failed to move above its previous high. There is next support at the July lows, and then at line d.

There is resistance for DIA now in the $129 to $130 area.

Volume was very low - for the entire week volume was less than half of the volume we saw on June 1. Despite the lack of volume, a push higher is still possible. A rally above $129.71 keeps this short-term rally alive and the 52-week high at $133.14 is within striking distance. Support is at $124 and if it's broken it signals lower prices are to come. Additional support is at $120.19, the June 4 low, but is unlikely to hold if $124 is broken.





HLF July 47.50 Calls 53% APPL Aug 650 Calls 67%
DLTR Aug 110 Calls 32% UIS Oct 17 Calls 79%
HSY Aug 70 Calls 56% TSO Nov 25 Calls 54%
NKE Oct 92.50 Calls 49% HLF July 47.50 Calls (again) 38%

PowerShares QQQ ETF (Nasdaq: QQQ), representing the Nasdaq 100 index, created a new monthly high on July 19 (line e), edging past resistance at $65.25 (July 5 high). Selling on July 20 quickly stifled a further advance though.

It still closed the week up over 1.6%, as the much stronger than expected earnings in the tech sector gave it a boost.

It still closed the week up over 1.6%, as the much stronger than expected earnings in the tech sector gave it a boost.

There were some interesting developments in the semiconductor stocks, as they appear to be bottoming.

Next support for QQQ waits at $64 (the 20-day EMA) with stronger levels at $62.60 to $63.40 and the uptrend (line f).

This ETFs A/D line was weaker than prices, which is a reason for concern. While QQQ formed higher highs, the A/D line formed lower highs (see arrow).

The A/D line had broken through its major downtrend (line g) in early July, so the reversal is a problem. The A/D line closed the week back below its WMA, and has important support at line h.

There is resistance at $65 to $65.30, with $65.80 to follow. The all-important 78.6% resistance stands at $66.72.

If the ETF can rally and hold above the July 19 high at $65.31 the next targets are $66.40 and $67.60. The 52-week high at $68.55 is unlikely to be tested as the region between the upside targets is stiff to resistance. Also, once again, volume has been in a fairly steep overall decline when compared to levels in May and early June.

Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, couldn't muster a rally last week, and finished well below the July 5 high.

Lack of a new high in the week ahead could mean that support is likely to be tested shortly. The nearest support is at $77.59, the July 12 low. Additional support is at $74.78, created by a series of daily lows throughout June. Primary support is just beyond at $72.94 (June 4 low), which if penetrated indicates the next major wave down in the downtrend is already underway.

While unlikely, more upside could develop in this ETF. In order for that to materialize, the support levels can't be broken. Additionally, the price will need to rally above the July 5 high at $81.84. If that occurs, resistance is above at $83, followed by the 52-week high at $84.66.




Conclusion for the ETFs

The mid-week rallies managed to push some of the ETFs to monthly highs, yet the bullish moves were unconvincing. The upward push had no follow through and gave way to morning selling on Friday (July 20).

Declining volume in the ETFs is also a concern; except for in the iShares Russell 2000, volume has been dropping from the May levels, creating a negative divergence with the price rally we have seen in June and July.

More upside could still arise in the ETFs, but the rally is likely to be stifled before we reach the 52-week high price levels. A move back towards support should be watched closely; if broken, a further slide in prices is likely forthcoming.

Other Important Articles Relating to the Week Ahead

1. The Economy and Earnings in the Week Ahead – July 23, 2012

2. The Past Week Stock Market Results – July 23, 2012

3. The Week Ahead in the Stock Market – July 23, 2012


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