Markets picked up steam this week, managing to make higher highs than last week. Volatility has been depressed since the start of the year, and that continued this week. Average True Range (ATR) readings for the major index ETFs are holding steady at levels not seen since May, 2011 - well before the steep August decline. Friday's higher open puts the S&P 500 (NYSE:SPY) ETF and the Dow Jones Industrial (NYSE:DIA) ETF near the highs of last week, while the PowerShares QQQ (Nasdaq:QQQ) and Russel 2000 iShares (NYSE:IWM) ETF have moved aggressively higher from last week's price action.

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

S&P 500 SPDRS (NYSE:SPY) ETF, representing the S&P 500 index, moved progressively higher this week, managing to take out last Thursday's high at $133.40. That was an important move as it means the uptrend is still in tact. The ETF is now very close to the July, 2011 intra-day high at $135.70 (resistance). It is now likely this area will be tested. A downward sloping trendline can be drawn between the May, 2011 high and the July, 2011 high; when extended to the right it is clear to see the market has broken this trendline. This means a test of the May high at $137.18 is not unlikely if near-term resistance is penetrated. One cause for concern, though, is the steadily declining volume as the market moves higher. Ideally volume should rise as the market rises; when it does not, it signifies a lack of interest. The MACD is also showing a slight negative divergence - indicating potential underlying weakness. (For related reading, see Trading The MACD Divergence.)

DJ Industrial Average (NYSE:DIA) ETF is in a similar position to SPY, but is much closer to the May, 2011 at $128.63 (on a price-adjusted basis this level has been exceeded as shown on chart). This is the next resistance level to watch, as a rise above this level is significant and means a longer-term uptrend is still unfolding. As with SPY, though, volume is not confirming the rally, and there is also a negative divergence on the MACD. The upward sloping trendline since October, 2011 can be used as a guide - if the market breaks back below the rising trendline (currently near $123) it is a strong signal to take caution. (For related reading, see The Utility Of Trendlines.)

PowerShares QQQ (Nasdaq:QQQ) ETF, which represents the Nasdaq 100, is at a 52-week high. While QQQ paused near resistance from August, 2011 last week, it has broken away this week. In fact, we need to go back to 2001 - when the market was still declining from the tech crash - to see current levels. This means there is very little traditional resistance in sight. Volume once again remains a potential issue, but the MACD is more in-line with confirming the move higher. Given the series of highs between $59 and $60 in 2011, this area should now act as support. A move back below $59 is a strong sign for caution. (For related reading, see Support & Resistance Basics.)

Russell 2000 iShares (NYSE:IWM) ETF has been moving aggressively higher over the last few sessions, breaking away from last week's price action. The gap higher on Friday broke above a downward sloping trendline which can be drawn from the May, 2011 high at $86.61. Before that high is challenged IWM will need to break through the July high at $58.97. Volume has not significantly picked up on the rally, and the MACD is barely past October levels even though price has moved far beyond October levels - these are both potential warnings signals. The upward sloping trendline which began in October can be used as a guide, with a drop below the line at $76 warning of a potential trend reversal.

The Bottom Line
Markets are moving higher this week, with SPY and DIA hovering near last week's highs while QQQ and IWM are moving more convincingly to the upside at the present time. Price action is quite strong and there is still room to move higher. There are warning signals though, mainly that volume is not significantly rising and there is negative MACD divergence in at least two of the four ETFs. The warning signals are signs of immanent danger though, as they are not timing indicators. Instead the upward sloping trend lines can be used to control risk, with a drop below indicating a potential reversal in the trend. (For related reading, see Retracement Or Reversal: Know The Difference.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.

Charts courtesy of stockcharts.com

Related Articles
  1. Mutual Funds & ETFs

    ETF Analysis: ProShares UltraPro Nasdaq Biotech

    Obtain information about an ETF offerings that provides leveraged exposure to the biotechnology industry, the ProShares UltraPro Nasdaq Biotech Fund.
  2. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Europe Financials

    Learn about the iShares MSCI Europe Financials fund, which invests in numerous European financial industries, such as banks, insurance and real estate.
  3. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Insurance

    Learn about the SPDR S&P Insurance exchange-traded fund, which follows the S&P Insurance Select Industry Index by investing in equities of U.S. insurers.
  4. Mutual Funds & ETFs

    ETF Analysis: SPDR S&P Emerging Markets Small Cap

    Learn about the SPDR S&P Emerging Markets Small Cap exchange-traded fund, which invests in small-cap firms traded at the emerging equity markets.
  5. Mutual Funds & ETFs

    ETF Analysis: ETFS Physical Platinum

    Learn about the physical platinum ETF. Platinum embarked on a bull market from 2001 to 2011, climbing to record prices along with other precious metals.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI Turkey

    Learn about the iShares MSCI Turkey exchange-traded fund, which invests in a wide variety of companies' equities traded on Turkish exchanges.
  7. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  8. Mutual Funds & ETFs

    ETF Analysis: Guggenheim Enhanced Short Dur

    Find out about the Guggenheim Enhanced Short Duration ETF, and learn detailed information about this fund that focuses on fixed-income securities.
  9. Mutual Funds & ETFs

    ETF Analysis: iShares US Oil&Gas Explor&Prodtn

    Learn about the iShares U.S. Oil & Gas Exploration & Production ETF, which provides an efficient way to invest in the exploration and production sector.
  10. Mutual Funds & ETFs

    ETF Analysis: iShares Morningstar Small-Cap Value

    Find out about the Shares Morningstar Small-Cap Value ETF, and learn detailed information about this exchange-traded fund that focuses on small-cap equities.
RELATED TERMS
  1. Exchange-Traded Fund (ETF)

    A security that tracks an index, a commodity or a basket of assets ...
  2. Exchange-Traded Mutual Funds (ETMF)

    Investopedia explains the definition of exchange-traded mutual ...
  3. Fintech

    Fintech is a portmanteau of financial technology that describes ...
  4. Indicator

    Indicators are statistics used to measure current conditions ...
  5. Intraday Momentum Index (IMI)

    A technical indicator that combines aspects of candlestick analysis ...
  6. Lion economies

    A nickname given to Africa's growing economies.
RELATED FAQS
  1. What assumptions are made when conducting a t-test?

    The common assumptions made when doing a t-test include those regarding the scale of measurement, random sampling, normality ... Read Full Answer >>
  2. What does a high turnover ratio signify for an investment fund?

    If an investment fund has a high turnover ratio, it indicates it replaces most or all of its holdings over a one-year period. ... Read Full Answer >>
  3. Does index trading increase market vulnerability?

    The rise of index trading may increase the overall vulnerability of the stock market due to increased correlations between ... Read Full Answer >>
  4. What is the difference between passive and active asset management?

    Asset management utilizes two main investment strategies that can be used to generate returns: active asset management and ... Read Full Answer >>
  5. How are double exponential moving averages applied in technical analysis?

    Double exponential moving averages (DEMAS) are commonly used in technical analysis like any other moving average indicator ... Read Full Answer >>
  6. Is there a situation in which wash trading is legal?

    Wash trading, the intentional practice of manipulating a stock's activity level to deceive other investors, is not a legal ... Read Full Answer >>

You May Also Like

COMPANIES IN THIS ARTICLE
Trading Center
×

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!