The ETFs: Reaction Will Dictate Stock Market Movement!
by Ian Harvey
September 08, 2012
Stocks jumped up this past week, especially on September 6 when the indexes climbed near 2%. For some of the major index Exchange-Traded Funds, that was enough to push them just above resistance levels. However, other index ETFs remained below resistance, but was close to it. As mentioned in prior weeks, this is a pivotal area of stocks. How the market reacts in this area is likely to dictate the next major move that's to occur, and whether it is to the upside or downside.
• The S&P 500 SPDRS (ARCA: SPY), made another 52-week high last week, pushing above the former high (August 21) at $143.09 -- suggesting the bulls might be in charge.
The uptrend since June remains intact as well as the trend channel the ETF has been trading in since that time. The channel has accurately represented the price swings up and down, and the ETF is currently pushing at the upper limit. Resistance from the 2011 and early 2012 highs are also in this area.
The upper channel line - resistance - crosses at $145, although that will edge higher over time.
Over the last few months, the ETF has reached the upper channel line and then pulled back to the lower portion of the channel. Channel support is currently around $138.50. A drop below the channel indicates further weakening is likely.
Declining volume continues to be a concern; as the ETF rises it is doing so on an engine that is weakening. Currently the trend remains up, and until price drops below the trend channel, that uptrend remains the dominant factor.
The S&P 500 A/D line has moved back to its long-term downtrend, line h, and is back above its ’Weighed Moving Average’ (WMA). A strong move above this negative divergence resistance and the August highs would turn it positive.
• The Dow Jones Industrial Average SPDR (ARCA: DIA) ETF hovers near the May 1 high at $133.14. This area therefore remains a resistance until it is significantly cleared.
The ETF has been moving higher within a trend channel, which has represented price swings very well since June. The channel is arguably a wedge - a chart pattern that often signals a trend reversal - as the price action is converging while moving higher - lines and b, with the upper boundaries, line a, in the $135 area.
Since the channel is rising, the upper trendline will give resistance at $135 in the week ahead. The lower trendline provides support at $130. A drop below the channel (or wedge) signals a further price decline towards the 200-day moving average at $126.
The weekly relative performance or RS Analysis has plunged over the past few weeks as the DIA has been much weaker than the S&P 500. This explains the drop in many of the high-yield big cap stocks as the market seems to be less afraid of risk.
The weekly on-balance volume (OBV) looks strong as it turned up last week and is holding well above its rising WMA and uptrend, line d.
'Wedge' in technical analysis, is a security price pattern where trend lines drawn above and below a price chart converge into an arrow shape. Wedge shaped patterns are thought by technical analysts to be useful in analyzing a short to intermediate term reversal of what the analyst feels to be the major price trend.
Once the price breaks out of the wedge, it is expected to return to the major trend. Technical analysts see a 'breakout' of this wedge pattern as either bullish (on a breakout above the upper line) or bearish (on a breakout below the lower line). A wedge shape pointing upwards (rising wedge) is used in analyzing an upward price trend within an overall downward price trend. A level wedge is considered a period of consolidation, which will not reverse the current major trend. Finally a wedge pointing downwards (falling wedge) is used to analyze a downward price trend within an overall upward price movement.
TOP OPTIONS TRADES SINCE JULY 01, 2012
|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%|
|SLV Nov 30.00 Calls||114%||JCP Nov 25.00 Calls||67%|
|GLD Nov 165.00 Calls||72%|
• PowerShares QQQ ETF (Nasdaq: QQQ), representing the Nasdaq 100 index, ETF jumped above the August 21 high at $68.88 this week, putting in a new 52-week high, easily exceeding the highs from early in the year as it hit $69.55. The upper trend line on the weekly chart, line e, and the weekly Starc bandsare now in the $72 area.
As the trend of this ETF accelerated in early to mid-August, it broke above the trend channel it had been trading in. The old channel is still useful though - both trendlines are now acting as support. The upper band, which is the former resistance, now provides support at $67.30 - a price that was respecting on the most recent pullback. A drop below that support indicates a decline towards $64.25, the main trendline since June.
Having cleared resistance, the upside targets are $69.60 followed by $72.30 based mostly on the breakout of a flag formation.
Unlike the DIA, the relative performance analysis on the QQQ continues to look strong as it is well above its rising WMA. Note that the broader measures of the technology sector are leading the market higher.
• Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, The iShares Russell 2000 Index (ARCA:IWM) ETF moved up aggressively this past week, clearing two resistance levels -- breaking through the trend line resistance in the $83 area. The next obstacle the ETF faces is the March 27 52-week high at $84.66. Beyond that are the multiple 2011 price peaks between $86 and $86.81, which should act as a significant resistance if the price extends to those levels.
The Russell 2000 A/D line (not shown) has finally broken through its downtrend from the February highs indicating that new money is flowing into the more speculative small cap stocks. A successful retest of the breakout will support the bullish case.
Support is at $80, and if the ETF drops below that the trendline and 200-day moving average gives support just above $78.
Conclusion for the ETFs
It was a strong week for stocks and all the ETFs remain in uptrends since June. Not all the ETFs have cleared resistance to a significant degree though, which means that there is still the possibility that this rally could stall out very close to current levels.
On the other hand, if all these ETFs clear that resistance, it is a strong signal that this market has more upside left. A breach of support by the ETFs warns that the bullish tone may be changing, and given the importance of these current levels such a warning deserves attention.
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