What do they say?

Commentary:
After a sell-off last week, this week prices managed to stabilize in the major index ETFs. The prior correction threw up warning flags as several support levels were broken, but as we close out the week, the price has managed to climb back above those support levels, indicating this rally may not be over yet. That does not necessarily mean to go on a buying binge, though. When price action occurs like what we have seen over the last two weeks, there are reasons to be both bullish and bearish; therefore, risk management becomes crucial. In each of these ETFs, there are important levels to watch, which can help establish entry pointsand control losses.

SEE: Risk Management Techniques For Active Traders

S&P 500 SPDRS (ARCA:SPY)

The S&P 500 SPDRS (ARCA:SPY) put in a swing low at $134.49 on May 9, which was a drop below prior support at $136. Late week trading saw a pick up though, with Friday’s action trading much of the session back above $136. Also of note is that the March 6 low at $134.36 was not breached on the decline. This is a significant level and if breached, it would warn of a larger correction into primary support near $130. The more lateral movement this week can also provide some insight into potential moves higher. A rise back above $138 signals a move to $140 and potentially $142 (if the former is exceeded). A rise above the 52-week high at $142.21 means this rally still has legs. Therefore, this week’s price action can be used as a gauge; if we see a rise back above $138, there is a slight bullish bias and a drop below $134 is bearish.

Dow Jones Industrial Average SPDR (ARCA:DIA)

The Dow Jones Industrial Average SPDR (ARCA:DIA) did not create a new low this week and managed to hold above the April 10 low at $126.92. The $127 area has been support going back to mid-February, with resistance kicking in near $133 since mid-March. Therefore, this ETF is in a short-term range within a longer-term uptrend. A break below the low of the range at $126.92 is likely to result in further declines, targeting the $122 to $121 region which is primary support. A rise above $130 is short-term bullish likely triggering buying into the upper portion of the range – $132 to $133. A rise above the 52-week high at $133.14 indicates a breakout a continuation of the uptrend.

PowerShares QQQ ETF (Nasdaq:QQQ)

PowerShares QQQ ETF (Nasdaq:QQQ), representing the Nasdaq 100 index, remains in an uptrend that began back in October. That trendline does not intersect until just below $63, which means that even though the ETF has been declining since early April, the bull market remains in effect. $63 is significant, though, and if penetrated, it could lead to further declines into a $59 target price. On the other hand, a rise back above $65.25 is likely to bring in some buying, targeting $66 to $66.50. Right above this target is a short-term trendline that is drawn from the 52-week high at $68.55 and extending down over the recent swing high on May 1 ($67.63). If that trendline is broken – which requires a move back above $66.75 – it would be a signal of a potential retest of the 52-week high and the possibility of an even higher price.

SEE: Support & Resistance Basics

Russell 2000 iShares Index (ARCA:IWM)

Russell 2000 iShares Index (ARCA:IWM) ETF, representing the Russell 2000 index, continues to hold within the range it has been trading in. Support, which has been in place since late January, continues to hold at $77.97. A drop below that level is bearish with a target of $72. Within the range a rise back above $80 may spur some buying, targeting resistance at $82 and $84. A rise above the high of the range at $84.66 indicates an upside breakout. False breakouts have been prevalent in this ETF throughout the year though, and therefore the other index ETFs likely present high probability opportunities. If the other ETFs continue to decline the Russell 2000 could be hit hard as it has been relatively weak for much of 2012. For that same reason (relative weakness) rallies could be muted in the ETF even if the other indexes begin to rally once again.

Bottom Line

While markets stabilized this week, the prior weeks decline resulted in some mixed signals. Major support levels are within proximity, which means, if penetrated, there is a reason to sell or get short. But if those levels hold next week and prices begin to move above this week’s highs it could spark buying interest once gain. Support and resistance should be watched closely as they present both entry signals and risk controls. The outlook for the markets is not definitive (is it ever?) but by using risk management and being nimble there are still opportunities in this market environment.

 

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