The Major ETFs in the Week Ahead
October 29, 2012

ETFs Key Support Levels Threatened!

by Ian Harvey

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October 27, 2012

Introduction

The markets in the United States moved lower this past week after jobless claims and pending home sales came in below economists' forecasts. Jobless claims came in at 369,000 compared to 372,000 that were forecasted, while pending home sales rose only 0.3% compared to the forecasted 2.5%. But, the real driver behind the decline was poor corporate earnings, including misses by major companies like Apple (Nasdaq: AAPL), General Electric (NYSE: GE) and Amazon (Nasdaq: AMZN).

Global markets have also struggled over the past week, with unemployment in the eurozone rising to "deplorably high" levels, according to ECB President Mario Draghi. Recently, the ECB lowered its projection for economic growth in the eurozone for 2012 and 2013, while also raising its forecast for inflation in the region. The bank expects the eurozone to drop 0.4% this year and grow 0.5% next year, while inflation could rise 2.5% in 2012 and 1.9% in 2013.

The Outlook for the Major ETFs

The weekly chart of the S&P 500 SPDRS (ARCA: SPY) moved lower this past week after breaking down from the 50-day moving average at $143.33.

The daily chart of SPY shows that the recent low at $142.58 and the uptrend (line f) were decisively broken on Monday. The low on Friday was not far above the 38.2% 'Fibonacci Retracement’ support at $140.11. This also corresponds to the lows from late August.

There is additional chart support in the $138.50 to $139 area, with the 50% support at $137.64. The break last week suggests that at a minimum some backing and filling in the $140 to $143 area is needed before a bottom could be in place.

Any rally should find tough resistance now at $142.58 to $143.50, and then $145.

The S&P 500 Advance/Decline (A/D) line tried to bounce after breaking support (line h), but turned lower again Friday, as the A/D numbers were negative. The A/D line is in a fairly narrow sideways range, with key resistance still at line g.

The index is now consolidating at a prior high from mid-August, but could move lower to the 200-day moving average at $136.77 before a more robust rebound takes hold. The moving average convergence divergence (MACD) indicator remains in a free fall with little sign of a crossover in the near-term, while the relative strength index (RSI) remains at 37.37, suggesting that the index may be somewhat oversold.


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The Dow Jones Industrial Average SPDR (ARCA: DIA) ETF also moved lower this past week after breaking down from its 50-day moving average at $132.99. The index is now consolidating at a key 61.8% retracement level at $129.7, but could move lower to the 200-day moving average at $128.31 before a durable recovery is seen.

Like the SPY index, the MACD indicator remains in a free fall with a widening gap while the RSI remains oversold at around 33.81, suggesting that the stock could rebound slightly before any move lower.


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PowerShares QQQ ETF’s (Nasdaq: QQQ), representing the Nasdaq 100 index, followed the other major ETFs with a move lower, breaking down from its 50-day moving average at $68.11.

The QQQ broke its daily uptrend (line b) just over a week ago, then violated the 50% Fibonacci support at $65.30 this past week.

This makes the next downside target the all-important 61.8% support, now at $64.05. Tech giants like Apple (AAPL) and Amazon.com (AMZN) will both need to rally in order to keep the QQQ from dropping below this level.

The Nasdaq-100 A/D line has continued to make lower lows, but is not showing any increase in downside momentum. It needs to surpass its recent high and then the downtrend (line b) before a bottom can be in place.

The daily chart now has resistance at $66.50 and the former uptrend, with the declining 20-day ’Exponential Moving Average’ (EMA) at $66.87. There is key resistance at $68 to $68.30.

After briefly retesting the 50-day moving average, the index has fallen down to its 200-day moving average at $64.88 where it's likely to experience a bit of support. While the index's MACD remains in a free fall with a widening gap, the RSI remains oversold at 30.74, suggesting that the index could consolidate before any further downside.


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Russell 2000 iShares Index (ARCA: IWM) ETF, representing the Russell 2000 index, has also moved largely lower over the past week, breaking down from its 50-day moving average at $82.87.

The IWM is acting much better than the tech sector, as it is still holding well above the 50% retracement support at $79.85. Its uptrend (line d) has held so far.

The Russell 2000 A/D line has broken its uptrend (line e), suggesting that IWM could also break its corresponding support. There is next support for the A/D line at the early August lows.

There is initial resistance in the $82 area, with further levels at $83 to $84.

Currently, the index is trading in a tight range between the 50-day and 200-day moving average at $79.92, which should provide a strong base of support. Meanwhile, the MACD remains in a relative free fall suggesting further downside, and the RSI is reading at around 36.12 suggesting that the index may be poised for a break from the downside with some sideways movement.


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Conclusion for the ETFs

The major U.S. ETFs moved lower this week after poor corporate earnings and economic readings took their toll. On a technical basis, the S&P 500 and Dow Jones Industrial Average ETFs are poised to see further downside, while the PowerShares QQQ and Russell 2000 Index ETFs remain at or near key support levels that could mean some sideways trading or a rebound.

In the week ahead, traders will look towards a number of key economic indicators and additional earnings announcements. In particular, U.S. personal income and outlays will come out on October 29, U.S. jobless claims will come out on November 1, the ISM Manufacturing Index is due out on the same day and U.S. employment data is scheduled for November 2.

Other Important Articles Relating to the Week Ahead

1. The Economy and Earnings in the Week Ahead – October 29, 2012

2. The Past Week Stock Market Results – October 29, 2012

3. The Week Ahead in the Stock Market – October 29, 2012

4. Companies Reporting Earnings in the Week Ahead - October 29, 2012


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