The ETFs -- Spyder Trust (SPY) higher than it was at the end of April!
by Ian Harvey
August 13, 2012
The stock market index Exchange-Traded Funds (ETFs) pushed slightly higher last week, for the most part, but some performed better than others. The last four days of the week was flat for the major index exchange-traded funds, with the price action confined to a small range.
Volume was also near the lowest levels seen in the last year. Close proximity to 52-week highs in three of the four index ETFs could attract buying to test those levels. Therefore, the trend currently remains up for the ETFs, but a break below key support levels would warn of a significant decline.
The Outlook for the Major ETFs
• The S&P 500 SPDRS (ARCA: SPY), was relatively flat last week, trading much of the time just above $140.
There is next resistance at $141.66 within close proximity to the 52-week at $142.21 from April 2, which are the highs from early in the year. A significant level like this can often act like a magnet, pulling the price towards it., The upper trend line on the weekly chart (line a) is in the $144 area.
Using Monday's high at $140.92, the 38.2% 'Fibonacci Retracement’ support is at $135.66, with the 50% retracement support at $134.03.
The weekly on-balance volume (OBV) has moved above the April highs (line b), and its ’Weighed Moving Average’ (WMA) is now trying to turn up.
While volume remains light, it is quite likely the $142 area could be tested and potentially exceeded. Based on current conditions, though, a large rally is unlikely to unfold from current levels. Further rallying is more likely to be short covering and short-term technical buying as opposed to longer term investors and funds wanting to own shares. Evidence of this is the declining volume and also bearish divergence on many indicators. The relative strength index (RSI) has failed to make new highs since the middle of June as the price of the ETF has risen. Yet, price is what matters, and currently it is moving higher.
A drop below $139.56 will be the first sign that a correction is underway, with the 20-day ’Exponential Moving Average’ (EMA) now at $137.75.
Short-term, a drop back below $139 warns of a correction to $135.50 -the short-term upward trendline. A drop below $135.50 warns that the short-term uptrend is over and the downtrend which began in April is continuing. The rising 20-week EMA is at $123.70.
• The Dow Jones Industrial Average SPDR (ARCA: DIA) ETF was also relatively flat, hovering just above $131 much of the week. The 52-week high at $133.14 is within striking distance. That is the next resistance level and will act as a pivot point.
Short-term, a rise above $132 is likely to result in a test of the 52-week high which could spark buying interest and short covering if that important level is exceeded. If the ETF pushes through the 52-week high it should be able to hold above it, if it can't hold above it on a closing price basis, the potential for a double top is high. The weekly chart shows a potentially bearish rising wedge formation (lines c and d), with the upper boundary in the $135 area.
This is because volume continues to decline and the RSI continues to flat-line even while the price of the ETF edges higher.
A drop below $130 is likely to trigger selling with the 20-day EMA representing first support at $129.38, with more important levels at $127.51, which was the August 2 low. The weekly chart has good support in the $124.25 to $125.25 area.
If selling continues below $127.50 it is a significant warning sign that the short-term uptrend is over.
The weekly relative performance is trying to turn up, as it is just barely above its WMA. The weekly OBV moved through its downtrend (line f) in the middle of July, and has made new highs for the year.
The Dow Industrials A/D line (not shown) is still lagging the price action, so it is giving a different picture from the OBV.
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, was bolstered higher on Monday, but traded horizontally in a narrow range, with a high of $66.91 and a low of $66.28, for the rest of the week. There is additional resistance from late April in the $67.63 area.
Once again, the ETF is fairly close to the 52-week at $68.55, a level not seen since the start of April. Before that level is reached though there is resistance at $67.63 (May 1 high) and $67. A sustained push through $67 is likely to trigger a challenge of the next resistance level, and if that is exceeded look for the price to head towards that 52-week high mark.
It may not be a smooth ride though. A drop below $66 indicates the price will decline into trendline support at $62.75. There is initial support at $65.25 to $65.50, with the rising 20-day EMA at $64.92. From last Tuesday's high at $66.92, the 38.2% Fibonacci retracement support is at $64.29,with the 50% support at $63.47.
While the short-term trend is up at this time, and could continue, it is important to note that since April the ETF is in an overall downtrend.
Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, popped higher on Monday, gaining 0.7% for the week, but is still below the converging resistance in the $80 to $81 area (line a). In July, IWM had a high of $82.
The weekly relative performance has turned up, but still shows a pattern of lower highs and lower lows, with resistance at line b.
The weekly OBV has been holding above its WMA, and did improve last week. The OBV is well above its uptrend (line c).
This ETF has been in a downtrend since late March, but has seen some signs of strength beginning in June. Whether that strength can continue though is very questionable, as a series of lower highs since July indicates there is little buying interest. These price movements have created a triangle formation, and when the formation breaks it is likely to signal the longer term direction of the ETF. Currently, the triangle provides resistance at $80.75, although $82 (a recent swing high) provides a more reliable breakout signal.
If the upside breakout occurs the target is $92.41. This target is well above the 52-week high at $84.66. Unless the other index ETFs all continue to move aggressively higher, this scenario is unlikely to unfold.
On the other hand, a drop below $79 is likely to trigger selling into support of the triangle pattern at $76.40. A breach of $76.40 signals a significant decline in price, as the downtrend continues and price moves toward the triangle breakout target of $64.75.
Conclusion for the ETFs
In the short-term the trend remains higher for these stock market index ETFs. For three out of four of the the ETFs, the 52-week high is within striking distance, and those pivotal levels could be tested and even exceeded. If the price approaches those levels watch for double tops or false breakouts.
Declining volume and indicator divergence warn of underlying weaknesses. The short-term trendline is also a valuable tool for ETFs. As long as the price remains above trendline support the ETF is creating higher lows and the push higher can potentially continue. If that trendline support is broken though, it warns of a longer-term correction.
Other Important Articles Relating to the Week Ahead