August 3, 2012 Market Summary

By Cory Mitchell | August 03, 2012 AAA

Friday, August 3 proved to be a strong day once again for the major index ETFs. For two weeks in a row now we have seen a Friday jump, after sideways-to-lower price movement during the week. The strength on Friday is significant though, creating two month highs in three of the four index ETFs. The short-term trend remains higher for all the indexes, although some are performing better than others. Also within striking distance in several of the ETFs are the 52-week highs. Signals are mixed though on different time frames - with certain time frames pointing to a correction, while the two month uptrend seems to be strong and signaling higher prices.

S&P 500 SPDR (ARCA:SPY) put in a high for the week on Monday, July 30 at $139.94, before declining to $135.58 on August 2. On August 3, strong early buying eclipsed the weekly high, pushing the index to its highest level in almost three months. Throughout June and July the index has been moving past prior short-term price peaks, and then quickly retreating, before moving higher once again to make another incremental high. If this pattern holds the index could experience some profit taking early next week. The proximity to major resistance and the 52-week high at $142.21 could attract buying though. Strong resistance is expected between $140 and the 52-week high, but such a level can often act like a magnet - the bulls buy in anticipation of a new high, forcing the bears to cover. The uptrend through June and July remains intact, and is only broken if the index declines below $135. Longer-term the current price is still below the April and May price peaks, indicating a longer-term downtrend may be under way. The possibility of a double top can't be ruled out either, especially if volume continues to be low as the index approaches the 52-week high.

The Dow Jones Industrial Average SPDR (ARCA:DIA) pushed to a weekly high, as well as the highest price in almost three months, after aggressive buying on Friday, August 3. The main point of interest for this index is the close proximity to the 52-week high at $133.14. Resistance is expected between $132 and the 52-week high, but once again the importance of the level could act like a magnet, making a test of the level likely. The uptrend for June, July and now August, remains higher, with $126.50 acting as trendline support. A drop below that level warns of a larger correction, with a move below $124 confirming the selling pressure. A rise above the 52-week indicates short-term and long-term strength, but ideally needs to be matched by an increasing volume. Without strong buying interest, represented by volume, the chance of a double top near the 52-week high greatly increases.

SEE:Interpreting Support And Resistance Zones

PowerShares QQQ ETF (Nasdaq:QQQ) remains some distance away from its 52-week high, but did surge to the highest level since May 7 this week. Short-term the trend is up over the last two months, as the price moves choppily higher. Longer-term, the trend is down as the current price remains below the April high at $68.55 (52-week high) and the May high at $67.63. Resistance covers a large area, and is between $66.25 and $68.55. Trendline support is at $62.30, with a move below warning of a larger correction. There is a series of intra-day lows near $61.50 a key level to watch, as a drop below could push the price lower than $60. Light volume remains an issue. If the index pushes into the resistance area, or above it, volume should ideally increase. If it doesn't, the chance of a price correction is elevated.

The iShares Russell 2000 Index (ARCA:IWM) ETF is not confirming the other indexes in their moves to multi-month highs. After hitting a 52-week high of $84.66 in March, the ETF has created lower highs in May and July. The July high is the next major resistance level at $82, and if penetrated could trigger buying into the $84 region. Continued weakness is a more likely scenario though; since February, anytime the ETF stages an advance it is quickly nullified and slides back. Support is at $76, $74.75 and $72.94. Choppy trading in the ETF means false breakouts through support and resistance are common and is expected to continue. Until a more stable trend develops in the Russell 2000, either up or down, trading opportunities are more abundant in the other index ETFs.

The Bottom Line
Multi-month highs in three of the four index ETFs signal short-term strength, yet significant resistance remains overhead. For the ETFs in close proximity to the 52-week high, a test of those levels is expected - important levels often act like a magnet. Without confirmation though from other index ETFs, and an increase in volume, the possibility of a double top is high. The current trend higher should be traded as long as it intact, but watch the support levels - a break down indicates further selling could ensue.

Charts courtesy of stockcharts.com

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

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