What do they tell?

End of the week selling has taken the major ETFs off the weekly highs. The shortened trading week started out bullish for stocks as some minor resistance levels were broken, indicating a further rise in stocks. On June 6 though, that buying came to a halt, and selling eroded or completely erased all gains seen during the week. As discussed in last week’s market summary, there still could be upside in this market, but it is unlikely that the index ETFs will be able to create new 52-week highs. Despite the late week selling, though, the indexes are in a short-term uptrend, which could continue. But caution is warranted on the long side. We have had one wave down in the market followed by a correction. If we move lower again, the drop is likely to be more volatile than the drop we had in May.

S&P 500 SPDR ETF (ARCA:SPY) managed to close above the $136.25 resistance level on July 2, which indicated another move higher. So far the ETF has not been able to reach the $139.75 target, though. It could still happen, but with the pullback in late week trading back below the former $136.25 resistance level, the possibility has become less likely. The 52-week high of $142.21 is therefore unlikely to challenged. On-balance volume has shown a bearish divergence for some time, but now there is also a non-confirmation signal in the short-term as well. Over the last two weeks the ETF made a higher high (broke above $136.25) but on-balance volume did not. Therefore, selling pressure is accumulating on both the long-term and short-term time frames. Minor support is at $133.40 followed by the June 25 low at $130.85. A drop below the latter is likely to result in a test of the June 4 low at $127.14 (unadjusted). If that low is breached, the next downside target is at $126, followed by $122 (if we move below $126).

SEE: Technical Analysis: Support And Resistance

The Dow Jones Industrial Average SPDR (ARCA:DIA): The short-term trend for the ETF is higher, and on July 3 it managed to break above $128.71, the June 19 high. The rally was short-lived though as selling on July 6 dropped the ETF well below that price point once again. The 52-week high is at $133.14 is still within striking distance if a push higher continues, but the failed breakout makes it a less likely scenario than further declines. A drop back below $123.75 has bearish implications, and provides further downside targets of $120, followed by $116 if the former is breached. Similar to the S&P 500 SPDR, there are long and short-term bearish divergences on the on-balance volume indicator. The new price high in May was not matched by a new high in the indicator, and the recent rally in late June and early July also didn’t receive confirmation from the indicator. This indicates that underlying the price action selling pressure is mounting.

SEE: The Anatomy Of Trading Breakouts

PowerShares QQQ ETF (Nasdaq:QQQ), representing the Nasdaq 100 index, broke above $64.57, the June 20 high, on July 3, signaling a move to $66. Strong selling on July 6 dropped the price back to well below the breakout point, meaning $66 is unlikely to be tested for some time. Minor support is below at $63. The next level to watch is $61.54, the June 28 low. A drop below $61.50 could trigger selling into support. Support is at $60 followed by $59. The $59 mark is important because it was a resistance area back in October and November, and should now support declines. If it does not, it is a longer-term bearish signal. The next target would be at $56, should $59 be breached in the coming week(s). On-balance volume shows the same long-term bearish divergence as the other ETFs, indicating that a new 52-week high anytime soon is highly unlikely under current conditions.

Russell 2000 iShares Index (ARCA:IWM) ETF, representing the Russell 2000 index, cleared a couple major hurdles to the upside this week. On July 2 and 3 the ETF continued to push beyond the June 20 at  $79.08. This was a positive short-term sign for the ETF and resulted in the target of $81.50 being hit. Minor support is now at $77.50, but $74.60 is the real level to watch.  If the latter level is penetrated a test of the June 4 low at $72.94 is likely. If that materializes, the next downside target is $71, followed shortly by $70, which is right in the vicinity of the long-term upward trendline going back to 2009. Long-term bearish divergence on the on-balance volume indicator means overall selling pressure, but short-term the indicator is moving in muted fashion higher. The short-term confirmation of the indicator means there is still some buying pressure, but likely not enough to over-come longer-term selling forces.

Bottom Line:
Late week selling eroded or completely erased any gains seen from buying earlier in the week. Most of the ETFs will finish the week below the resistance levels they recently broke, indicating false breakouts. This price action, coupled with bearish divergence in on-balance volume, will make it very difficult for the indexes to reach a new 52-week high any time soon. The trend since the start of June is higher though, and it is possible that could continue. There are risks though. Support levels should be watched closely, for if they are broken, further declines are likely. If another wave lower develops it is likely to be more volatile and severe than the decline in May was.

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