ETFs Suffers Negativity! Apple to Set the Standard!
by Ian Harvey
October 22, 2012
Last week’s action was the most negative we have seen in some time, as most of the major ETFs closed near the day's lows. This will likely trigger more selling in Asian markets early Monday, which may make for a wild opening that day in the US markets.
To turn the short–term outlook around, we need to see a higher close this week. Otherwise, the risk of a sharper decline in the other sectors will increase.
They could catch up with the tech sector. If Apple’s earnings do disappoint, it could trigger a selling climax. On the other hand, a strong close in Apple this week could easily stabilize the tech sector.
Even though the energy and materials sectors gave up some of their gains on Friday, the charts still indicate that they have completed their corrections.
The drug sector also still looks pretty good, as it has a seasonal tendency to bottom at the end of the month.
The weekly chart of the S&P 500 SPDRS (ARCA: SPY) shows that since it broke through resistance in September (line b), the weekly ranges have been quite tight. The low for the past six weeks is at $142.58, which is about one point above Friday’s close. The rising 20–week ’Exponential Moving Average’ (EMA) is at $140.75.
The longer–term pattern remains positive, as it shows a pattern of higher highs and higher lows, and is well above the uptrend (line c). There is major support now in the $138 to $140 area, which it includes the highs from March. Prices are in the middle of their weekly Starc bands.
The weekly on–balance volume (OBV) is still holding above its WMA and the uptrend (line d). It did not form any divergences at the recent highs, which would be expected at a major top. In early 2011, the OBV did form a divergence (line 1), which was the start of a five–month decline.
The S&P 500 Advance/Decline (A/D) line (not shown) did move above its previous highs last week, but then reversed on Friday.
A drop below the last two lows would negate last week’s positive action.
The Dow Jones Industrial Average SPDR (ARCA: DIA) ETF broke out of its weekly rising wedge last month (line e), but has made little progress so far. The rising wedge chart formation needs to be watched as it can result in nasty declines – however, this should not be the case! They are often completed when the bullish sentiment is very high.
There is good support now in the $130 to $131.50 area, and then at $129.65. The uptrend is currently around $128.40, so a weekly close below this level would be negative.
The weekly relative performance or RS analysis had tried to improve, but has now turned down from its WMA. A drop below the September lows would be a negative sign for the large–cap stocks.
The OBV closed below its rising WMA, but is still above its uptrend. A sharp drop below the uptrend would be an indication of weakness.
The DIA has been the weakest of the ETFs, but this data does not include dividends, which would put it above the IWM. It does demonstrate that the large–cap dividend stocks have been out of favor since the June lows.
PowerShares QQQ ETF’s (Nasdaq: QQQ), representing the Nasdaq 100 index, dropped to significant new correction lows on Friday, and closed just above the 50% 'Fibonacci Retracement’ support at $65.30. A drop below this level will signal a decline to the all–important 61.8% support at $64.05.
The QQQ has also broken down through a key support trendline and could see downside to the $64.69 200-day moving average, driven by Google's very bearish earnings report this week. Traders will be watching for a breakdown of this key moving average that could lead to significant additional downside, with the next support level being the $60 low seen in early June of this year.
The weekly OBV (not shown) is still holding above its WMA, and did confirm the highs last month. The Nasdaq–100 A/D line (not shown), on the other hand, has been lagging badly, and is getting close to its longer–term uptrend.
The MACD indicator appears to be in free fall, while the RSI appears to be approaching oversold levels, suggesting that there could be a small rebound from the 200-day moving average before another significant move.
This yearly performance chart of the four index–tracking ETFs shows that the QQQ has given up almost a third of the gains that it had in September. It is still the strongest performer, but is getting closer to the SPY.
Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, was down over 2% Friday, dropping below the prior week’s lows after a good rally during the middle of the week. The next good support is in the $80 area, which also corresponds to the uptrend.
The IWM has also broken down through a key support trendline and the 50-day moving average, and could see downside to the $79.76 200-day moving average. Traders may therefore want to consider taking a short position to capitalize on this downside to the 200-day moving average, while being mindful of the MACD indicator that could be poised for a bullish reversal.
As noted last week, a decisive close below $80 would suggest that the strength in early September was not a change in trend for the small caps. There is additional support in the $78 area.
The Russell 2000 A/D line (not shown) tested its WMA last week, but has since reversed sharply and dropped below the previous lows. It is still above the uptrend from the summer lows.
Finally, the RSI also appears to be moving into oversold territory, which could lead to some buying pressure over the next couple of weeks.
Conclusion for the ETFs
Many major U.S. indexes, particularly ETFs, saw some reversal patterns this past week, as weak housing data and corporate earnings reports dragged on the market.
Traders will be closely watching corporate earnings in the week ahead, as it will likely determine the long-term direction of the markets this quarter. Meanwhile, U.S. jobless claims and 'Federal Open Market Committee - FOMC' minutes are also due out in the week ahead and could impact trading as well.
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