The Major ETFs in the Week Ahead
October 01, 2012

ETFs Caught In Correction!

by Ian Harvey

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September 29, 2012

Introduction

The United States stock market moved sharply lower this past week due to a combination of profit taking, ongoing trouble in the eurozone and weakening economic data. New and pending home sales weakened more than economists had forecasted while the Chicago PMI came in at 49.7, which was below economist forecasts of 53.0, signaling a potential slowdown. However, the bulk of the economic data - including the U.S. employment situation - is due out in the week ahead, and could move markets.

In the eurozone, problems seem to be compounding even with the landmark agreement made earlier this month. The region's economic sentiment indicator fell by 1.1 points to 85.0, a seventh month of decline, while the market awaits the Spanish government's plan to restore its finances next year and additional economic data due out at the end of the month.

Therefore, as expected, early in the past week, the selling continued. By Wednesday, many of the major Exchange-Traded Funds -- ETFs -- reached more important support. The sharp rally took the major ETFs well off the lows, and despite the heavy selling early Friday, Wednesday’s lows did hold in all except the Dow Industrials.

It is still clearly a mixed market for the ETFs, as while the technical studies on the NYSE Composite and Russell 2000 still suggest that this is just a correction, the S&P 500 and Nasdaq 100 ETFs look much weaker.

The sentiment picture is also mixed, as individual investors are still not enthusiastic about the stock market—only 36.4% are bullish.

The Outlook for the Major ETFs

• The S&P 500 SPDRS (ARCA: SPY), had a low last week of $142.95, just above the recommended stop of $142.92. SPY did close below the 20-day ’Exponential Moving Average’ (EMA), which has flattened out.

The daily uptrend (line f) is at $141.50, with more important support in the $140.40 to $140 area.

The S&P 500 Advance/Decline (A/D) line dropped more last week than the NYSE, as it is well below its WMA. It turned lower again Friday after Thursday’s bounce. A drop below last week’s lows will signal an increase in selling pressure.

Minor resistance now stands at $145, with stronger levels at $146.24. A close above this level will signal a resumption of the uptrend.


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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 has continued to act weaker, as the prior week’s lows at $135 were broken, reaching a low of$134.48 on Friday. The next support is at $133, which was the August high, with additional support at $130-$131.

The Dow Industrials A/D line (not shown) broke its longer-term downtrend, but has still not been able to move above either the August or July highs.

The daily chart has first resistance at $135, with more important levels now in the $136 area.


PowerShares QQQ ETF’s (Nasdaq: QQQ), representing the Nasdaq 100 index, was hit pretty hard last week, as its low at $67.85 was not far above the late August high of $67.47, which is an important level of support. If it is broken, the next downside target is in the $65.50 to $66.50 area.

Apple (AAPL) contributed to the decline in the QQQ, as it lost almost $30. The next good support for AAPL is in the $650 area.

After breaking its downtrend, the Nasdaq-100 A/D line (line b) reversed sharply, dropping back below its WMA. The more important support (line c) was tested last week. A decisive drop below this level would be a sign of weakness.



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Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, ETF pulled back to retest the breakout level (line d), which is characteristic of a normal pullback. There is additional support at $80 with the uptrend (line e) in the $79.40 area.

The Russell 2000 A/D line also dropped back to test its WMA, but is still well above the August highs and further support. The former downtrend and the key uptrend (lines f and g) provide more important support.



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Conclusion for the ETFs

As was expected in the past week, more Eurozone news put pressure on the stock market.

From a technical standpoint, most of the major U.S. indexes have drifted to their lower support trendlines, while key indicators like RSI and MACD have moderated. The move could either pave the way for another leg up after some profit taking, as a new wave of buying prepares to come into play, or a secular move downwards, if the support is broken.

The correction does not appear to be over, and if stocks fail to rally above last Thursday’s highs early in the week ahead, a deeper correction looks more likely.

Although, low volume in the past week relative to the volume during the uptrend, has continued to help support the bull case.

From a fundamental standpoint, a lot of the pricing action in the week ahead will likely be determined by the progress seen in the eurozone and economic indicators due out for the U.S. The U.S. ISM Manufacturing Index will set the tone on October 1, while the markets will closely watch jobless claims on October 4 and employment data on October 5.

Clearly, the short-term outlook favors a cautious approach for now, and be sure you have your stops in place.

October is a seasonally strong period, which suggests a better buying opportunity is likely in the weeks ahead.

Other Important Articles Relating to the Week Ahead

1. The Economy and Earnings in the Week Ahead – October 01, 2012

2. The Past Week Stock Market Results – October 01, 2012

3. The Week Ahead in the Stock Market – October 01, 2012


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