ETFs: Correction Mode Encountered!
by Ian Harvey
October 06, 2012
The United States stock market moved higher this past week as the economy showed many signs of improvement across the board. Earlier in the week, the automotive sector received a boost from higher-than-expected car sales, while the ISM's non-manufacturing index and factory orders jumped above their respective consensus forecasts. The week was topped off by bullish employment figures released on October 5 showing an unemployment rate of just 7.8%.
Global markets also showed some optimism this past week. While the eurozone's unemployment rate remained steady at 11.4%, ECB President Mario Draghi indicated that the central bank stood ready to make additional bond purchases, if necessary, to support the region. The remarks helped to reduce the uncertainty in the eurozone and led to a fall in bond yields for many major countries in the region, including Spain and Italy.
• The S&P 500 SPDRS (ARCA: SPY), gave up its early gains on Friday, but the move above the prior week's high is consistent with the end of the correction. A move above the prior high at $148.11 should signal a test of the $150 level, where some selling should be expected.
The daily chart shows a positive, upward-sloping trading channel (lines a and b). The 20-day ’Exponential Moving Average’ (EMA) was tested on the recent correction, but is now trying to turn up once more. It is currently at $144.74, with additional support at $142.95.
The S&P 500 Advance/Decline (A/D) line has moved back above its WMA, and is now close to the downtrend (line c) that goes back to the highs it made in the spring. A strong close above this downtrend would be bullish.
There is support for the A/D line now at the uptrend (line d).
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%||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 gapped higher Friday, coming very close to the September highs at $136.48. For this week, the Starc band is now in the $140 area, which corresponds to 14,000 on the Dow Industrials. A close above this level could get the public's attention.
The Dow Industrials A/D line shows a pattern of higher lows, and is again close to the resistance (line g) that was formed during the summer. A strong close above this level would be a good sign, yet the relative performance or RS analysis suggests that the big-cap Dow stocks are still lagging the S&P 500.
The first support is at the lows of the past two weeks at $133.64 to $133.94. If broken, it should signal a drop to the $130 to $131 area.
• PowerShares QQQ ETF’s (Nasdaq: QQQ), representing the Nasdaq 100 index, opened strong Friday, but ended up lower for the day, which was disappointing. Apple (AAPL) was down more than $14, which did not help. The correction in AAPL may be close to over, and a close back above $676 would be positive.
The key support for QQQ is still at $67.94, which if broken could signal a drop to the $66.50 area. A daily close back above the $70 level will improve the short-term outlook.
The Nasdaq-100 A/D line has moved back above its WMA, but needs to surpass resistance (line b) to improve the outlook. Conversely, a drop below support (line c) would be a sign of weakness.
• Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, ETF surged in early trading Friday, reaching a high of $85.25 before it turned lower and closed down slightly for the day. There is still good support now in the $82.84 to $83.60 area, which was the breakout level (line d).
The Russell 2000 A/D line was very strong in early September, and has just corrected back to its WMA, where it appears to be holding. If the small caps are really going to lead the market higher, the A/D line should start leading prices higher.
Conclusion for the ETFs
Though the mixed close Friday was a bit disappointing, the technical outlook for the intermediate term still looks positive.
The major U.S. indexes appear to be divided into two camps - over bought on one side approaching upper trend lines and very neutral in the case of the latter two ETFs. Traders will therefore be watching for either a pullback or a breakout from these levels, while waiting for the latter indexes to reach a better price point to enter a position.
There are quite a few stocks that appear to have completed their corrections last week, but other stocks still look weak, so one needs to be selective.
Buying stocks that have positive weekly and monthly trends and that have pulled back to chart and retracement support still looks to be a good strategy. For those who are not invested in stocks, the Select Spyder ETFs may be a better alternative.
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