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The Weekly Charts

May 7th, 2012 · No Comments

Correction extending?

After being predominately flat most of the week, the major index ETFs are retreating on Friday and heading toward support. While no major levels have been broken, the sell off has resulted in the potential that some significant levels could be broken. As the index ETF levels approach the April lows, a break below those levels, especially if it occurs in multiple ETFs, is a bearish sign. Certain ETFs have been stronger than others, but if those April lows are pierced by more than two of the major ETFs (discussed below) it will hard for the stronger ETFs to stay afloat. That said, if support holds this could turn out to be a great buying opportunity.

SEE: 3 Steps To A Profitable ETF Portfolio



The S&P 500 SPDRS (ARCA:SPY) has been in a strong uptrend since October and remains in that uptrend despite the recent spurts of selling seen in April and now May. The key level to watch in this ETF is the April 10 low at $135.76. Support below is $134 and could stall further declines. Moving $3.20 during the week on average this support level is within striking distance next week, but a significant drop below is unlikely. As stated, though, this ETF is still in an uptrend. A climb back toward $141.66, the May 1 high, is a positive sign and signal the 52-week high at $142.21 is likely to be tested. This latter scenario could take two weeks or more to develop, assuming prior mentioned support is not broken in the mean time.

Dow Jones Industrial Average SPDR (ARCA:DIA)


The Dow Jones Industrial Average SPDR (ARCA:DIA) created a new 52-week high on May 1 at $133.14 indicating there is still strength here. One issue that was addressed in prior market summaries, though, is the possibility that this pair could be within an expanding range. The April 10 low was below the March 6 low, and now we are seeing a retreat off the newly established 52-week high. When incremental breakouts occur but are quickly reversed, trend following strategies (on short time frames) become harder to employ. Therefore, the area between $133.14 and $126.92 (April 10 low) is a “no man’s land” and false breakouts are quite possible in an expanding range environment. A significant move will be required to break this pattern; such a move above the 52-week high is likely to head for the target area of $137, while a downside breakout below $126.92 (April 10 low) is likely to trigger selling into primary support at $122.
PowerShares QQQ ETF (Nasdaq:QQQ)


PowerShares QQQ ETF (Nasdaq:QQQ), representing the Nasdaq 100 index, is another index (like the S&P 500) that has moved in an undeterred uptrend since October. The move lower on May 4 is bringing the ETF in proximity to the April 24 low at $64.45. A drop below that level would be the first time in seven months that a major lower low occurred. Due to the aggressive rally that occurred early this year, the long-term trend line does not intersect until near $62. That level is likely to provide support should $64.45 be broken to the downside. A rally back above $68 is a positive signal as it would create a higher relative to the May 1 high recently witnessed. Such a scenario sets up a likely retest of the 52-week high at $68.55; assuming support holds that could take two more weeks to develop.

SEE: Simple Strategies For Capitalizing On Trends

Russell 2000 iShares Index (ARCA:IWM)


Russell 2000 iShares Index (ARCA:IWM) ETF, representing the Russell 2000 index, has a well-tested support level at $78. As the ETF has moved laterally for more than three months, $78 has been tested on multiple occasions and so far has held up. Given that the ETF is already weak compared to other index ETFs (mentioned above) a drop below $78 is likely to be a significant event–the target of which is $72. Support along the way is at $76 which is also a significant level and should be watched closely as the price could bounce off of it. Upside potential in this ETF remains muted as it continues to move sideways. If the other ETFs manage to gain traction next week there is one potential trade in IWM and that is to go long near support anticipating the range will continue. Stops can be kept quite tight just below $78 with a target near $82. Though if weakness continues in all the ETFs, this one could be hit fairly aggressively to the downside.

Bottom Line

The selling seen on May 4 to close out the week could spook some investors and traders. The important thing to remember though is that the trend is still up in the S&P 500 and Nasdaq 100 and arguably the Dow Jones Industrial Average. Therefore, until support is broken, there are potential buying opportunities on these pullbacks. Ultimately, if major support levels are broken, there is the potential for further downside into the targets mentioned. Upward pressure near current levels present low-risk opportunities (as relatively tight stops can be used) for picking up relatively strong index ETFs and stocks.

Charts courtesy of

Tags: Technical Analysis