The ETFs: Strong Trending Moves!
by Ian Harvey
August 06, 2012
For the first time since May, the monthly jobs report did not disappoint the stock market, as it surged to new rally highs in reaction to the best job growth in some time. The overall unemployment rate actually rose, but that did not stop the buying and the short covering.
And, Friday also proved to be a strong day once again for the major Exchange-Traded Funds (ETFs). For two weeks in a row now we have seen a Friday jump, after sideways-to-lower price movement during the week. The strength on Friday is significant though, creating two month highs in three of the four index ETFs.
The short-term trend remains higher for all the indexes, although some are performing better than others. Also within striking distance in several of the ETFs are the 52-week highs.
However, even these impressive gains were not enough to turn the technical outlook positive for the ETFs.
Signals are mixed though on different time frames - with certain time frames pointing to a correction, while the two month uptrend seems to be strong and signaling higher prices.
The market internals, like the Advance/Decline (A/D) line, are still lagging the price action -- the majority of strongly trending moves in the stock market are characterized by the market internals leading prices, not lagging them.
The Spyder Trust (SPY) had its best day in quite some time, gaining 2%. The S&P 500 is now not far below the widely watched 1,400 level, and the Dow Industrials has settled well above 13,000.
• The S&P 500 SPDRS (ARCA: SPY), put in a high for the week on Monday, July 30 at $139.94, before declining to $135.58 on August 2. On August 3, strong early buying eclipsed the weekly high, pushing the index to its highest level in almost three months -- well above the 78.6% 'Fibonacci Retracement’ resistance at $138.98, and the next resistance stands in the $140 to $142 area.
Throughout June and July the index has been moving past prior short-term price peaks, and then quickly retreated, before moving higher once again to make another incremental high. As SPY has made higher highs since early July, the S&P 500 A/D line has formed lower highs (see arrows). However, even with Friday’s strong action, the A/D line is still below its previous peak and its slightly declining WMA. The A/D line needs to move convincingly above the downtrend (line h) to signal a new intermediate-term uptrend.
Although, if this pattern holds the index could experience some profit taking early next week -- the proximity to major resistance and the 52-week high at $142.21 could attract some buying. Strong resistance is expected between $140 and the 52-week high, but such a level can often act like a magnet - the bulls buy in anticipation of a new high, forcing the bears to cover.
The uptrend through June and July remains intact, and is only broken if the index declines below $135. A drop in the A/D line below last week’s lows would turn the outlook negative, as it would create a clear pattern of lower lows and lower highs. There is minor support now at $137.50 to $138, with the 20-day EMA now at $136.49.
Longer-term the current price is still below the April and May price peaks, indicating a longer-term downtrend may be under way. The possibility of a double top can't be ruled out either, especially if volume continues to be low as the index approaches the 52-week high.
Clearly, the 2009 forecast made by many economists, was way off in regard to ETFs future performances, as the Spyder Trust is up over 36% since November 2009.
• The Dow Jones Industrial Average SPDR (ARCA: DIA) pushed to a weekly high, as well as the highest price in almost three months, after aggressive buying on Friday, August 3. The main point of interest for this index is the close proximity to the 52-week trend line resistance (line a), with resistance from the May highs at $131.85 to $133.14.
Resistance is expected between $132 and the 52-week high, but once again the importance of the level could act like a magnet, making a test of the level likely. The uptrend for June, July and now August, remains higher, with $126.50 acting as trendline support. But, the Dow Industrials A/D line is still well below the July highs and the longer-term downtrend (line c). This resistance is derived from the bearish divergence that formed at the early May highs.
The A/D line turned up sharply Friday, and could be starting a new uptrend, but it still needs to overcome its downtrend to turn positive.
A drop below the $126.50 level warns of a larger correction, with a move below $124 confirming the selling pressure. There is initial support now at $128.42 (the 20-day EMA) and then at $127.51 which was Thursday’s low.
A rise above the 52-week indicates short-term and long-term strength, but ideally needs to be matched by an increasing volume. Without strong buying interest, represented by volume, the chance of a double top near the 52-week high greatly increases.
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%|
|APPL Jan 13 650.00 Calls||71%||CSTR Oct 42.50 Puts||400%|
|LNKD Aug 92.50 Puts||30%||LNKD Aug 100.00 Calls||250%|
• PowerShares QQQ ETF (Nasdaq: QQQ), representing the Nasdaq 100 index, remains some distance away from its 52-week high, was the strongest last week, as it closed up almost 1.5%, the highest level since May 7, as well as solidly above the prior three highs, which classifies as a bullish breakout.
The close on Friday above the 61.8% resistance at $65.29 makes the 78.6% resistance at $66.72 the next major target. This also corresponds to the upper parallel resistance (line f) at $66.50 to $67. The May highs are next at $68.
The Nasdaq-100 A/D line held above the prior lows last week, and has turned up. It is still below its declining WMA and the prior high. The A/D line needs to move above its downtrend (line g) and the early July highs to turn positive.
For QQQ, there is first good support now at $64 and the 20-day EMA, with additional levels at $62.30 to $63.
Short-term the trend is up over the last two months, as the price moves choppily higher. Longer-term, the trend is down as the current price remains below the April high at $68.55 (52-week high) and the May high at $67.63. Resistance covers a large area, and is between $66.25 and $68.55. There is a series of intra-day lows near $61.50 a key level to watch, as a drop below could push the price lower than $60.
Light volume remains an issue. If the index pushes into the resistance area, or above it, volume should ideally increase. If it doesn't, the chance of a price correction is elevated.
• Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, is not confirming the other indexes in their moves to multi-month highs – although it did reverse sharply to the upside Friday, gaining over 2.6%, but it was still a bit lower for the week. There is substantial converging resistance in the $80 to $81 area, and then at $82, which was the July high.
After hitting a 52-week high of $84.66 in March, the ETF has created lower highs in May and July. The July high is the next major resistance level at $82, and if penetrated could trigger buying into the $84 region.
Continued weakness is a more likely scenario though; since February, anytime the ETF stages an advance it is quickly nullified and slides back. Support is at $76, $74.75 and $72.94. Choppy trading in the ETF means false breakouts through support and resistance are common and is expected to continue. Until a more stable trend develops in the Russell 2000, either up or down, trading opportunities are more abundant in the other index ETFs.
Conclusion for the ETFs
The market surprised many with its great finish to a somewhat choppy week -- even though the Spyder Trust was only about 0.5% higher on the week!
The negative divergence between the major ETFs and their Advance/Decline lines, have not been overcome. This does not mean the market cannot move higher, but it is not the strong technical reading that was evident in September 2010 or October 2011.
Of course, this could change in the next few weeks, but there are a few things that must occur to turn the outlook bullish, particularly for the ETFs.
Other Important Articles Relating to the Week Ahead