Any resistance in sight?

Markets lost ground this week, but managed to claw back some of the losses on August 24. While the week was still down overall, the index ETFs remain very close to 52-week highs, and two of the ETFs actually made new 52-week highs this week. That is a positive sign, but as mentioned in prior market summaries, this is a critical juncture for stocks. Declining volume warns the rally may be running out of steam, but price – the ultimate indicator – continues to move higher. Using another indicator, the true strength index, we can isolate potential turning points quite early, and keep ourselves in the trend if the price continues to rally.

The S&P 500 SPDR (ARCA:SPY) ETF made a new 52-week high this week at $143.09. That was just above the former high of $142.21. After making the new high, the ETF quickly retreated back toward $140, signaling the break to a new high may be false. It is too early to tell if the move higher was a “fake-out,” but the lack of follow-through at such a pivotal level does warrant caution on the long side. A better short-term indicator, though, is the rising trendline, which started in June. If that trendline is breached to the downside, a top is likely in place. Currently, trendline support is at $136.65. The true strength index (TSI) shows a long-term divergence between the price high in April and the recent high. This is negative for stocks. The TSI is in short-term-rally mode, like price, but TSI has a smoother trajectory. As long as price and the indicator are rising, the best play is to stay long. If the upward trendline in the TSI breaks, it will be an early sign that price is also likely to move lower.

Dow Jones Industrial Average SPDR (ARCA:DIA)

The Dow Jones Industrial Average SPDR (ARCA:DIA) ETF reached a high of $133.02 this week, just shy of the $133.14 52-week which occurred back in April. The ETF retreated from the 52-week high toward $130, showing there is resistance in that area. Without confirmation from the Dow, it is highly unlikely the other index ETFs can stage a strong rally. If the ETF can take another run at the 52-week high in this low-volume environment, and surpass it, the price target is between $136 and $139. The TSI indicator is showing a long-term bearish divergence, which is negative for the ETF but is not a trade signal in itself. The upward trendline,which started in June, can be used as a trade signal. Trendline support is at $128.25, and if the price respects that line, it is a buying opportunity for another move higher. If the line is penetrated, it warns a price top is likely already in place. The TSI can be used in the same way. The indicator is an uptrend currently – if that uptrend is broken, the price of the ETF is likely to fall.

SEE: Technical Analysis: Support And Resistance

PowerShares QQQ ETF (Nasdaq:QQQ)

The PowerShares QQQ (Nasdaq:QQQ) was the other ETF that made a fresh 52-week this week at $68.88, surpassing the former mark of $68.55 from April. While the ETF did pull back after making the high, it held up better than some of the other index ETFs and remains close the new high. If the push higher continues, the price target of $69 to $70 is close at hand. Volume increased as the new high was made, a positive sign, but is still well below historic volume levels – that’s bearish. Trendline support for the current rally is at $63.65. If the trendline is broken, the price is likely to continue to move lower. TSI can provide a more timely signal than the price trendline. The indicator is rising, and as long as it continues to rise, the price trend is in no danger. If TSI falls below it’s own trendline, it warns of a reversal in the price trend.

SEE: Retracement Or Reversal: Know The Difference

iShares Russell 2000 Index (ARCA:IWM)

The iShares Russell 2000 Index (ARCA:IWM) ETF remains well off the 52-week high of $84.66 seen back in March, but did create a multi-month high this week. On August 21 the ETF hit an intra-day high of $82.71, the highest price since early May. The movements within the ETF remain more choppy than trending, which means breakouts have a higher chance of failing. $82 was a former resistance level, breached this week, but ultimately the ETF fell right back below it. Even if the ETF climbs above $82 again, there is further resistance at $83, $84 and $84.66. Support is at $77.25 and $76. The TSI can once again be used to verify price movements. If the uptrend in TSI continues, look for the price to begin challenging those resistance levels. If the trendline of the TSI is penetrated, the price action is likely to weaken.

SEE:Interpreting Support And Resistance Zones

Bottom Line:

The ETFs pulled off their highs this week, with two of the ETFs managing to create 52-week highs. The TSI is useful in trend confirmation, and also for isolating potential reversals in the trend quite early. Unfortunately, no indicator is accurate all of the time. Currently, the price trend remains higher, and that can’t be ignored. But with multiple divergences and sluggish volume, there is cause for caution. Use stops and don’t get married to only one side of the market. At these important levels, we will either get confirmation that the market is indeed going higher, or the warnings signs will be become reality and the price drop will come.

Charts courtesy of stockcharts.com