The Major ETFs in the Week Ahead September 17, 2012

The Sector Leader ETFs!

by Ian Harvey

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September 15, 2012

Introduction

The financial stock market finished the week with solid gains, as the 'European Central Bank - ECB' and Fed’s action was better than the markets expected. This had been a primary concern of many and had kept them out of stocks.

The major Exchange-Traded Funds (ETFs) have all managed to do well in the past week. The Spyder Trust (SPY) closed up 1.9%, while the SPDR Diamond Trust (DIA) gained 2.1%. Even more impressive was the Russell 2000, as the iShares Russell 2000 Index (IWM) was up 2.6%.

Technology stocks had been leading the charge for the past month, but last week the Nasdaq-100-tracking PowerShares QQQ Trust (QQQ) as was up only 1%.

The Outlook for the Major ETFs

• The S&P 500 SPDRS (ARCA: SPY), moved above the daily Starc band at the end of the week. This makes some sideways action or a pullback likely.

The breakout level is at $143.20 (line a), with the 20-day ’Exponential Moving Average’ (EMA) at $142.80. There is much stronger support in the $140 area, with the clearly rising 200-day MA at $135.27.

The S&P 500 Advance/Decline (A/D) line was finally able to overcome the bearish divergence resistance (line b) that went back to the April highs. This is a positive sign, though we could see a retest of the breakout level on a correction.

The 127.2% 'Fibonacci Retracement’t target at $145.27 has been exceeded, with the 161.8% target at $155.65. There is also psychological resistance in the $150 area.


• The Dow Jones Industrial Average SPDR (ARCA: DIA) ETF has reached the trend line resistance (line c) that goes back to last summer. The long-term resistance from the 2007 highs is in the $137.90 to $141.95 area.

The Dow Industrials A/D line formed a negative divergence at the early May highs (line d), and this resistance has been overcome. The A/D line shows a flag formation (lined d and e).

There is first good support now at $133.40, with the 20-day EMA next at $132.34. There is more important support around $128.50 to $130.


A 'Flag Formation' is a technical charting pattern that looks like a flag with a mast on either side. Flags result from price fluctuations within a narrow range and mark a consolidation before the previous move resumes. Likewise, "pennant" formations are usually treated like flag formations because they are very similar in appearance, tend to show up at the same place in an existing trend, and have the same volume and measuring criteria.

Flags and pennants are among the most reliable of continuation patterns and only rarely produce a trend reversal. The only difference between the two patterns is that a flag resembles a parallelogram (or rectangle) marked by two parallel trend lines that tend to slope against the prevailing trend. The pennant, however, is identified by two converging trend lines and more horizontal which resembles a small symmetrical triangle. The important thing to remember is that they are both characterized by diminishing trade volume and though different, the measuring implications are the same for both patterns as demonstrated in the above illustration.


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TOP OPTIONS TRADES SINCE JULY 01, 2012

TRADE GAIN TRADE GAIN
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% LVS Dec 45.00 Calls 67%

PowerShares QQQ ETF’s (Nasdaq: QQQ), representing the Nasdaq 100 index, daily chart shows the breakout above the March-April highs, which was followed by a late push to the upside on Friday. The major 50% Fibonacci retracement resistance from the 2000 highs has been overcome, with the 61.8% resistance level at $81.70.

The Nasdaq-100 A/D line has overcome its downtrend (line b), but is still lagging the price action. The rally in the Nasdaq needs to become more broad-based for the A/D line to catch up with prices.

There is initial good support in the $68 to $68.50 area and then at $67.50.


Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, ETF has put in an impressive performance in September, up 6.7% from the August close. This is likely a bullish sign for the overall market, as money is moving into the more speculative issues. Historically, a move into the small- and mid-cap stocks normally lasts several months.

The Russell 2000 A/D line peaked in February and formed a negative divergence later in the month. This bearish divergence resistance (line f) has now been overcome, and the A/D line is rising very sharply.

There is first support at $84.60 (line d), with additional levels at $82.85. Key support is now found in the $79 to $80 area.


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Conclusion for the ETFs

The sector ETFs that lead the market change constantly, but right now there four have been leading the charge higher over the last month:-

• The SPDR S&P Retail (ARCA: XRT) ETF

• The Financial Select Sector SPDR (ARCA: XLF) ETF

• The Consumer Discreet Select Sector SPDR (ARCA: XLY) ETF, and

• The Materials Select Sector SPDR (ARCA: XLB) ETF

All four sector ETFs have room to the upside, although the Financial and Materials sector ETFs are facing some significant overhead resistance. The Retail and Consumer Discreet ETFs are in strong long-term uptrends. Trends can change though, and while the short-term prospects look good for the bulls, support levels should always be monitored; if the price starts moving through support levels it could indicate an overall change in the direction of the ETF, and the stocks represented by that sector.

Other Important Articles Relating to the Week Ahead

1. The Economy and Earnings in the Week Ahead – September 17, 2012

2. The Past Week Stock Market Results – September 17, 2012

3. The Week Ahead in the Stock Market – September 17, 2012


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