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The Weekly Charts

February 5th, 2012 · No Comments

Rally continuing?

Commentary: Markets picked up steam this week, managing to make higher highs than last week. Volatility has been depressed since the start of the year, and that continued this week. Average True Range (ATR) readings for the major index ETFs are holding steady at levels not seen since May, 2011 – well before the steep August decline. Friday’s higher open puts the S&P 500 (NYSE:SPY) ETF and the Dow Jones Industrial (NYSE:DIA) ETF near the highs of last week, while the PowerShares QQQ (Nasdaq:QQQ) and Russel 2000 iShares (NYSE:IWM) ETF have moved aggressively higher from last week’s price action.

S&P 500 SPDRS (NYSE:SPY) ETF, representing the S&P 500 index, moved progressively higher this week, managing to take out last Thursday’s high at $133.40. That was an important move as it means the uptrend is still in tact. The ETF is now very close to the July, 2011 intra-day high at $135.70 (resistance). It is now likely this area will be tested. A downward sloping trendline can be drawn between the May, 2011 high and the July, 2011 high; when extended to the right it is clear to see the market has broken this trendline. This means a test of the May high at $137.18 is not unlikely if near-term resistance is penetrated. One cause for concern, though, is the steadily declining volume as the market moves higher. Ideally volume should rise as the market rises; when it does not, it signifies a lack of interest. The MACD is also showing a slight negative divergence – indicating potential underlying weakness. (For related reading, see Trading The MACD Divergence.)

DJ Industrial Average (NYSE:DIA) ETF is in a similar position to SPY, but is much closer to the May, 2011 at $128.63 (on a price-adjusted basis this level has been exceeded as shown on chart). This is the next resistance level to watch, as a rise above this level is significant and means a longer-term uptrend is still unfolding. As with SPY, though, volume is not confirming the rally, and there is also a negative divergence on the MACD. The upward sloping trendline since October, 2011 can be used as a guide – if the market breaks back below the rising trendline (currently near $123) it is a strong signal to take caution. (For related reading, see The Utility Of Trendlines.)

PowerShares QQQ (Nasdaq:QQQ) ETF, which represents the Nasdaq 100, is at a 52-week high. While QQQ paused near resistance from August, 2011 last week, it has broken away this week. In fact, we need to go back to 2001 – when the market was still declining from the tech crash – to see current levels. This means there is very little traditional resistance in sight. Volume once again remains a potential issue, but the MACD is more in-line with confirming the move higher. Given the series of highs between $59 and $60 in 2011, this area should now act as support. A move back below $59 is a strong sign for caution. (For related reading, see Support & Resistance Basics.)

Russell 2000 iShares (NYSE:IWM) ETF has been moving aggressively higher over the last few sessions, breaking away from last week’s price action. The gap higher on Friday broke above a downward sloping trendline which can be drawn from the May, 2011 high at $86.61. Before that high is challenged IWM will need to break through the July high at $58.97. Volume has not significantly picked up on the rally, and the MACD is barely past October levels even though price has moved far beyond October levels – these are both potential warnings signals. The upward sloping trendline which began in October can be used as a guide, with a drop below the line at $76 warning of a potential trend reversal.

Markets are moving higher this week, with SPY and DIA hovering near last week’s highs while QQQ and IWM are moving more convincingly to the upside at the present time. Price action is quite strong and there is still room to move higher. There are warning signals though, mainly that volume is not significantly rising and there is negative MACD divergence in at least two of the four ETFs. The warning signals are signs of immanent danger though, as they are not timing indicators. Instead the upward sloping trend lines can be used to control risk, with a drop below indicating a potential reversal in the trend. (For related reading, see Retracement Or Reversal: Know The Difference.)

Charts courtesy of stockcharts.com

Tags: Technical Analysis