Still pointing upwards?
Commentary:
Stocks rebounded this week; three of the major index ETFs look to have completed corrective waves, signaling a further advance. Two of those index ETFs have been, and remain in, strong uptrends, while the third was questionable last week. All three are once again moving in unison, and there is a strong chance of a further advance. One ETF, despite advancing this week, is not in an uptrend and is not confirming the other indexes.
| S&P 500 SPDRS (ARCA:SPY)
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The S&P 500 SPDRS (ARCA:SPY) uptrend has been unwavering since the October 2011 low. Corrective moves down have all stayed above the former corrective wave lower, resulting in a progression of higher lows accompanied by higher highs. On April 26, the ETF moved higher and broke above a short-term consolidation that began in early April. The move above that consolidation indicates that it is highly likely the ETF is in for another advance. In order for that to occur, the 52-week high at $142.21 will need to be penetrated. Based on an average weekly volatility of near $3 the ETF is unlikely to move beyond $144 next week; trend channel resistance comes in at $145. Levels to the watch on the downside are the April 10 and March 6 lows at $135.76 and $134.36, respectively. A drop below these levels creates a lower low scenario and is an indication of weakness and likely further declines over the following weeks. |
| Dow Jones Industrial Average SPDR (ARCA:DIA)
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The Dow Jones Industrial Average SPDR (ARCA:DIA) had created a lower low on April 10 (relative to March 6), which draws the uptrend into question. That said, strong upward price action this week pushed the ETF back toward the 52-week high at $132.68. Since the uptrend was broken, the potential exists for the pair to move higher and still simply be within an expanding range. Therefore, SPY provides a clearer signal, but DIA also is exhibiting signs of upside potential. If we see upside momentum continue next week, $135 is likely to be resistance. A drop back below the April 23 and April 10 lows at $128.16 and $126.92, respectively, warrant caution. |
| PowerShares QQQ ETF (Nasdaq:QQQ)
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PowerShares QQQ ETF (Nasdaq:QQQ), representing the Nasdaq 100 index, had been in a downward sloping trend channel since peaking at $68.55 on April 3. That channel, which looks similar to a flag formation, was broken this past week signaling another likely advance. Based on two different methods the target area is $69.50 to $70. There is resistance between $67.50 and $68, which the ETF will need to get through. A drop below the April 24 low at $64.45 would mean a lower low and likely continued weakness in the weeks that follow. Similar to the S&P 500 SPDRS, this ETF been in a strong uptrend since October, and therefore remains one of the strongest ETFs mentioned in this analysis. |
| Russell 2000 iShares Index (ARCA:IWM)
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Russell 2000 iShares Index (ARCA:IWM) ETF, representing the Russell 2000 index, has been a laggard among the aforementioned ETFs. The Russell 2000 has made little (upward) headway since early February, while the indexes mentioned above all advanced. During that time, the ETF has been within an expanding range between $84.66 and $78.14. The expanding range means breakouts cannot be trusted until a definitive move outside the range occurs, followed by a pullback that respects support/resistance of the former range. In the short-term, a rise above $81.60 could create a push toward the $84 region (this is currently underway). Due to the expanding range, a drop below the April 10 low at $78.14 could put in just a slightly lower low, such as $77.75, or it could mean a more significant decline. Under current conditions, the ETFs discussed above present clearer outlooks. |
Bottom Line
The S&P 500 SPDRS and PowerShares QQQ have maintained strong uptrends since October; the Dow Jones Industrial Average SPDR put in a lower low recently drawing the uptrend into question but is still showing signs of potential upside, and the Russell 2000 ETF continues to flat-line. With recent breaks above short-term resistance in SPY and QQQ it appears likely a further advance will develop, with DIA likely to be brought along for the ride. IWM remains the weakest of the group, but if the other ETFs advance, it is likely to challenge resistance within the expanding range it has been trading in. Always manage risk and be aware of significant support levels that may foreshadow larger declines.
Charts courtesy of stockcharts.com
