The Major ETFs in the Week Ahead September 24, 2012

ETFs Continue to Battle!

by Ian Harvey

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September 22, 2012

Introduction

Most of the major ETFs edged slightly higher last week, helped by Friday's quadruple witching, and despite a brief sell-off mid-week due to weak economic data. In the U.S., jobless claims unexpectedly rose to 382,000, while manufacturing in the Philadelphia region shrank for the fifth straight month in September. Looking ahead, a composite reading of U.S. leading indicators also showed a 0.1% downturn, which was worse than economist expectations of an even (0%) reading.

In the eurozone, manufacturing and services data came in weaker than expected. Markit's Purchasing Managers' Index (PMI), a gauge of business activity, fell to 45.9 in September, which was the lowest rating in over three years. Analysts believe that the region's economy is shrinking at a faster rate than the 0.2% quarterly decline seen during the second quarter of this year. While many traders are watching for an ECB rate cut to help the market next month, the increased tension in the region has led to higher bond yields and hurt stocks this past week.

The Outlook for the Major ETFs

• The S&P 500 SPDRS (ARCA: SPY), was not able to hold its early gains on Friday, as it closed lower. There is minor support at $145.63, which was last week’s low.

Below that, the 20-day ’Exponential Moving Average’ (EMA) is at $144.30, with the breakout level at $143.20. There is further support in the $140.40-$140 area, which includes the uptrend (line g).

The S&P 500 Advance/Decline (A/D) line corrected all week after breaking through the bearish divergence resistance (line h) -- that went back to the April highs. The A/D line now needs to surpass the recent highs to confirm the breakout.

The first real resistance is at $148.11 and the recent highs, with psychological resistance in the $150 area.

With the relative strength index (RSI) and moving average convergence-divergence (MACD) at high points, traders are watching for a retracement to those support levels at around $143.50 before a significant move higher, particularly as volume has weakened following the breakout.


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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%
GLD Oct 170.00 Calls 52% MON Jan 2013 87.50 Calls 26%

• The Dow Jones Industrial Average SPDR (ARCA: DIA) ETF also traded in a tight range last week, with the high at $136.24 and the low at $135. This is in contrast to the prior week’s $6 range.

But again, many traders are looking for a pullback in the week ahead for the ETFs, with both the RSI and MACD indicators at relative highs.

The first real support is around $133 to $133.60 and the 20-day EMA. There is further support in the $131.50 area.

The long-term resistance from the 2007 highs is in the $137.90 to $141.95 area.

The Dow Industrials A/D line did break its downtrend from the May highs, but is still badly lagging the price action.

Traders with bullish bets may want to keep tight stops, while those looking to take a position may want to wait for a retracement to around $133.


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PowerShares QQQ ETF’s (Nasdaq: QQQ), representing the Nasdaq 100 index, continued to push to the upside last week, as it made marginal new rally highs at $70.58.

The long-anticipated release of the new iPhone helped Apple (AAPL), as it gained another $8.60 for the week.

The daily chart of QQQ has first support at $69.55 and the early September highs, with more important levels at the April highs (line a) at $68.60.

For this week the weekly Starc bandis at $72.90. After breaking its downtrend, the Nasdaq-100 A/D line (line b) has failed to generate any upside momentum. The index showed signs of a topping towards the end of the week with the appearance of a doji star candlestick pattern.

Traders looking to initiate a position may want to wait for a retracement to prior support levels of around $68.50, particularly with volume weakening towards the end of the week, while those with existing long positions may want to consider taking some money off the table at these levels.


’Doji’ is the most famous candlestick. Among all different kinds of candlesticks and Doji Star is the most famous Doji pattern.

It is a name for candlesticks that provide information on their own and also feature in a number of important patterns.

A Doji candlestick is formed when the open and close price of a bar is equal or nearly equal.

The length of the upper and lower shadows can vary, and the resulting candlestick looks like, either, a cross, inverted cross, or plus sign. Doji convey a sense of indecision or tug-of-war between buyers and sellers. Prices move above and below the opening level during the session, but close at or near the opening level.

Therefore, in candlestick charting, a star refers to a small-bodied candle that gaps up or down in relation to the previous day's long-bodied candle. Star patterns suggest market indecision about a security and suggest a possible reversal of a trend. An investor might observe several types of star patterns on a candlestick chart.

Technical analysts will watch for Doji candlesticks and often use them as buying or selling signals when in context of another chart pattern. In addition, analysts will use them for timing when to avoid buying or selling an asset.

Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, ETF closed higher Friday, consistent with the resumption of the uptrend. The Russell 2000 A/D line has also turned up, and looks much stronger than those of QQQ or DIA ETFs.

The first support at $84.60 was tested last Thursday, with further levels in the $83 to $83.50 area. The key level of support is now waiting in the $79 to $80 area.

As with other ETFs mentioned here, the high RSI and MACD readings suggests that the index could see a pullback over the near-term. Traders looking to initiate a position may therefore want to look at the $82 level, while those with existing positions may want to consider taking some money off the table as well.


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Conclusion for the ETFs

The major Exchange-Traded Funds -- ETFs -- appear to be largely overbought at current levels, with high RSI and MACD readings across the board. From a fundamental standpoint, this may have been caused by the U.S. Federal Reserve's quantitative easing program (QE3) announced last week, which led to a sharp jump in stock prices. Unfortunately, the effects of this program could take time to materialize, while the eurozone's optimism also appears to be fading. As a result, traders may want to consider taking some profit and keeping tight stops on their existing positions for the ETFs.

Other Important Articles Relating to the Week Ahead

1. The Economy and Earnings in the Week Ahead – September 24, 2012

2. The Past Week Stock Market Results – September 24, 2012

3. The Week Ahead in the Stock Market – September 24, 2012

4. Quantitative Easing and Its Effect on the Stock Market - Indicator of the Week, September 24, 2012

5. The VIX Ready to Move Higher! - September 26, 2012


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