The ETFs: Ending In Bullish Style!
by Ian Harvey
July 30, 2012
The surprising comments from European Central Bank’s Mario Draghi on Thursday rocked the markets, with the Spyder Trust (SPY) closing up almost 2% for the week, making it the best week for the entire month. The Dow Industrials were able to move above the psychological level of 13,000. Both are now positive for the month.
What started as a negative week for the major stock indexes ended with in bullish style! July 26 and 27 saw a push higher in the index Exchange-Traded Funds (ETFs), with the S&P 500 SPDRS (ARCA: SPY) and the Dow Jones Industrial Average SPDR (ARCA: DIA) pushing at resistance once again. The late week surge higher keeps the short-term (June and July) uptrend intact for these ETFs. Not all of the major index ETFs are confirming though. PowerShares QQQ ETF (Nasdaq: QQQ), representing the Nasdaq 100 index, and Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, are not close to resistance, and therefore will not be making new short-term highs.
Volume also continues to be an element of concern. Indicators such as on-balance volume show declining interest in this rally, indicating it is more likely a bear market rally as opposed to the next wave higher in a longer term bull market.
The Outlook for the Major ETFs
• The S&P 500 SPDRS (ARCA: SPY), exploded to the upside last week, as it overcame the resistance at $138 to $138.50 and tested the 78.6% Fibonacci retracement level at $138.99.
The July 19 high at $137.21 is the closest resistance level. A close above resistance is a positive sign, showing the ETF is continuing the short-term uptrend (June and July) by putting in higher swing lows and higher swing highs. Yet, prior pushes higher in this rally have faltered shortly after making a higher high, therefore selling is expected to emerge by the time the ETF reaches $139.75. While unlikely, if that level is broken resistance beyond is at the 52-week high - $142.21. There is additional resistance from 2008 in the $144.40 area.
The nearest support is at $132.60 (July 12 low) and $130.85 (June 25 low). If $132.60 is penetrated, it creates a lower low and the two month uptrend is called into question. If a move lower materializes, the downside target is the major low from June 4 at $127.14.
Even though the SPY held above the key support at $132.60 last week, but the S&P 500 Advance/Decline (A/D) line did not.
The S&P 500 A/D has moved back above its WMA, but is still below the previous highs formed in July. The A/D line needs to close above the bearish divergence downtrend (line h) to signal that a new uptrend is underway.
There is initial support at $135.50 to $136 and then $134.50.
On-balance volume (OBV) is weakening long term and short term. The indicator's downtrend indicates selling is likely to resume before we reach the 52-week high levels. Short term, the July price was not confirmed by a July high in the indicator, signaling underlying weakness.
• The Dow Jones Industrial Average SPDR (ARCA: DIA) broke through the upper boundaries of its flag formation (line a) on Friday, with the Dow moving above 13,000. There is next resistance from the May highs at $131.85 to $133.14.
The ETF found support above the July 12 low of $124.77 last week, and then proceeded to rally back to the prior week's high. The July 19 high is $129.71, and if the ETF can manage to stay within that area in the week ahead, the 52-week high at $133.14 is within striking distance.
The Dow Industrials A/D line is still acting weaker than prices. In most healthy rallies, the A/D lines lead prices higher. Though the A/D line is back above its WMA, it is still well below the July high and the major downtrend (line d). This downtrend reflects the negative divergence that formed at the May highs and helped identify the top.
There is first good support now in the $127.60 to $128.80 area with more important levels near $127 to $126.16.
The divergence between buying volume and the rising price in the ETF indicates that it is going to be hard for this rally to sustain itself, unless volume increases on the "up" days. Three pullbacks in June and July put support right near the $124 area. If the ETF falls back through that area, the price is likely to decline into support at $120.19 (June 4 low).
TOP OPTIONS TRADES SINCE JUNE 01, 2012
|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%|
|FB Aug 25.00 Puts||500%||DISH Sept 30.00 Calls||100%|
• PowerShares QQQ ETF (Nasdaq: QQQ), representing the Nasdaq 100 index, unlike DIA, did not surpass the previous highs on Friday, though it was sharply higher, adding over 2%. It is still below the recent high and the 61.8% Fibonacci retracement resistance at $65.30. The 78.6% resistance is at $66.73.
Upside targets are $66.40 and $67.60 if the rally continues, although the 52-week high at $68.55 is likely out of reach unless we get a big pick-up in buying volume.
The Nasdaq-100 A/D line is also lagging the price action as it closed last Friday just barely above its WMA. It is below its prior peak and the downtrend (line g).
There is first support now at $64, with the 20-day EMA to follow at $63.60.
On-balance volume, again, shows declining buying interest on the recent rally with the July price high not being matched by a new high on the indicator. Additional support is $60, the major June 4 low, but is not in any immediate danger at this time.
• Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, came close to the June lows last week, as it hit $76.22 before reversing to the upside. In late June, the low was $75.42.
The Russell 2000 A/D line (not shown) did improve as IWM moved higher, but has not yet moved back above its WMA. It is still well below the major downtrend that goes back to February. This resistance needs to be overcome for the technical outlook to turn bullish on the small-cap stocks.
Support is close by at $76.22, followed by $74.78. If these levels are penetrated the downtrend is likely to continue, heading towards the June 4 low at $72.94. In order for the uptrend to continue, support must remain intact and the ETF will need to climb back above the July 5 high at $81.84. If that occurs, the next target or resistance level will be $83, followed by the 52-week high at $84.66.
Declining on-balance volume indicates a rise back to the $83 level (or high) is unlikely at this time, unless buy volume significantly increases.
Conclusion for the ETFs
The uptrend for June and July remains intact for the index ETFs, and can continue as long as the short-term highs are created and support levels hold.
Currently, the ETFs, S&P 500 SPDR and Dow Jones Industrial SPDR appear to be in the best shape, with the strongest short-term uptrends at this time.
Volume and buying interest are a concern for all of the ETFs though. On-balance volume is declining and price highs are not being confirmed by the indicator. In order for these rallies to sustain themselves, buying interest needs to pick up otherwise the downtrend is likely to resume.
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