The Major ETFs in the Week Ahead
August 20, 2012

The ETFs – Uptrend Likely to Continue!

by Ian Harvey

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August 20, 2012

Introduction

All the stock market index Exchange-Traded Funds made headway last week, and three of the four are in the vicinity of their 52-week highs.

A clear break above the 52-week high indicates another wave higher in a long-term uptrend could be underway. The current levels of these index ETFs are pivotal price points.

With declining volume and not all the indexes confirming the move to new highs, the possibility of a double top or false breakout to the upside remains a possibility. Therefore, this is a critical juncture for stocks, and it will determine if this uptrend continues or runs out of gas.

The Outlook for the Major ETFs

• The S&P 500 SPDRS (ARCA: SPY), has climbed back to the April 2 price peak. Challenging the 52-week high, this ETF has been quite strong recently. A breakout to the upside is possible, initiating the next wave higher in the uptrend. Since this is a long-term pattern, the price target is some distance away - between $145 and $149. Yet there are warnings signs this may not be another leg higher in an uptrend, but rather a bear-market rally likely to tucker out at any time.

Significantly declining volume warns of potential long-term weakness. Yet price is the ultimate indicator.

Currently the trend is higher and remains so until proven otherwise. A drop below the June-to-August trendline, currently intersecting at $136, is evidence the uptrend is over and further declines are likely to ensue.


• The Dow Jones Industrial Average SPDR (ARCA: DIA) ETF is moving toward its 52-week high at $133.14, but is not there quite yet. If the price call rally above the 52-week high it opens the possibility of another wave higher in the uptrend. The price target for such a move is $136 to $139.

The danger for "bulls" is the possibility of the ETF moving very close to the 52-week high or even breakout above it, only to quickly retreat - called a "bull trap". Therefore, price action right around the 52-week should be watched closely. A clear break higher indicates the rally is still going. On the other hand, failure to break the 52-week high - or failure to hold above it - is bearish.

The June-to-August trendline is also important; currently intersecting at $127.50. If that line is penetrated to the downside, it is likely this rally is over.




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TOP OPTIONS TRADES SINCE JUNE 01, 2012

TRADE GAIN TRADE GAIN
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, is taking a run at its 52-week high as well. On April 3 the ETF touched $68.55, a price not seen since.

Currently in rally mode, the 52-week high will be tested and possibly exceeded. Price projections based on the trend indicate there is not a lot of additional upside potential though. Targets range from $69 to $70, if the 52-week high is exceeded. If all the index ETFs move aggressively higher these targets could be exceeded, but that is not highly likely.

Declining volume once again indicates there is underlying weakness here, and it is possible the ETF will run out of steam near the 52-week high. Right now the trend is up though, and there is no need to fight it.

A drop below the short-term trendline, intersecting at $63.25 warns the rally is likely complete. In the meantime, keep a close eye on $68.55. That is the inflection point for more upside, or topping pattern signaling a price decline.


Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, moved higher last week, but is making still making overall lower price highs, and remains well below the 52-week high of $84.66.

The ETF has broken above a triangle pattern formed by the downtrend since March and the uptrend since June. The breakout is a bullish sign for the ETF, yet the ETF still needs to climb above resistance (June high) at $81.84. There is also resistance at $83 and the 52-week high, making the triangle price target of $92 unlikely to be hit.

Volume did jump on the triangle breakout, which is traditionally a good sign. Unfortunately, even when volume jumped it was below the average volume seen over the last several months.

The ETF has conflicting signals and trends. Failure to break or hold above any of the resistance levels indicates the ETF is likely to continue it's choppy trading pattern. A drop below trendline support at $76.70 warns of a further decline.


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Conclusion for the ETFs

If the 52-week highs are broken, and all the ETFs continue to move higher, another wave of the uptrend is likely underway. There are warnings signs though. These are critical price junctures for these ETFs, and declining volume and not all the ETFs confirming each other indicates they may be running out of steam.

Price is the ultimate indicator though, and right now it is pointing higher. Watch the 52-week high for early indications of a continuation or reversal. In the event of a reversal, watch the trendline support level.



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