August 10, 2012 Market Summary

By Cory Mitchell | August 10, 2012 AAA

Stock market index exchange-traded funds (ETFs) pushed slightly higher this week, for the most part, but some performed better than others. The last four days of the week was flat for all of the index ETFs, with the price action confined to a small range. Volume was also near the lowest levels seen in the last year. Close proximity to 52-week highs in three of the four index ETFs could attract buying to test those levels. Therefore, the trend currently remains up, but a break below key support levels would warn of a significant decline.

SEE: Support & Resistance Basics

The S&P 500 SPDR (ARCA:SPY) ETF was relatively flat this week, trading much of the time just above $140. Within close proximity is the 52-week at $142.21 from April 2. A significant level like this can often act like a magnet, pulling the price towards it. While volume remains light, it is quite likely the $142 area could be tested and potentially exceeded. Based on current conditions, though, a large rally is unlikely to unfold from current levels. Further rallying is more likely to be short covering and short-term technical buying as opposed to longer term investors and funds wanting to own shares. Evidence of this is the declining volume and also bearish divergence on many indicators. The relative strength index (RSI) has failed to make new highs since the middle of June as the price of the ETF has risen. Yet, price is what matters, and currently it is moving higher. Short-term, a drop back below $139 warns of a correction to $135.50 -the short-term upward trendline. A drop below $135.50 warns that the short-term uptrend is over and the downtrend which began in April is continuing.



The Dow Jones Industrial Average SPDR (ARCA:DIA) ETF was also relatively flat, hovering just above $131 much of the week. The 52-week high at $133.14 is within striking distance. That is the next resistance level and will act as a pivot point. Short-term, a rise above $132 is likely to result in a test of the 52-week high which could spark buying interest and short covering if that important level is exceeded. If the ETF pushes through the 52-week high it should be able to hold above it, if it can't hold above it on a closing price basis, the potential for a double top is high. This is because volume continues to decline and the RSI continues to flat-line even while the price of the ETF edges higher. A drop below $130 is likely to trigger selling into trendline support at $127.50. If selling continues below $127.50 it is a significant warning sign that the short-term uptrend is over.

SEE: Momentum And The Relative Strength Index



PowerShares QQQ ETF (Nasdaq:QQQ) was bolstered higher on Monday, but traded horizontally most of the week after that. Once again, the ETF is fairly close to the 52-week at $68.55, a level not seen since the start of April. Before that level is reached though there is resistance at $67.63 (May 1 high) and $67. A sustained push through $67 is likely to trigger a challenge of the next resistance level, and if that is exceeded look for the price to head towards that 52-week high mark. It may not be a smooth ride though. A drop below $66 indicates the price will decline into trendline support at $62.75. If trendline support is broken so is the short-term uptrend, and lower prices are likely to be seen over the longer term. While the short-term trend is up at this time, and could continue, it is important to note that since April the ETF is in an overall downtrend.

SEE: Interpreting Support And Resistance Zones



The iShares Russell 2000 Index (ARCA:IWM) ETF popped higher on Monday but made little progress the rest of the week. This ETF has been in a downtrend since late March, but has seen some signs of strength beginning in June. Whether that strength can continue though is very questionable, as a series of lower highs since July indicates there is little buying interest. These price movements have created a triangle formation, and when the formation breaks it is likely to signal the longer term direction of the ETF. Currently, the triangle provides resistance at $80.75, although $82 (a recent swing high) provides a more reliable breakout signal. If the upside breakout occurs the target is $92.41. This target is well above the 52-week high at $84.66. Unless the other index ETFs all continue to move aggressively higher, this scenario is unlikely to unfold. On the other hand, a drop below $79 is likely to trigger selling into support of the triangle pattern at $76.40. A breach of $76.40 signals a significant decline in price, as the downtrend continues and price moves toward the triangle breakout target of $64.75.



The Bottom Line
Short-term the trend remains higher for these stock market index ETFs. For three out of four the 52-week high is within striking distance, and those pivotal levels could be tested and even exceeded. If the price approaches those levels watch for double tops or false breakouts. Declining volume and indicator divergence warn of underlying weakness. The short-term trendline is also a valuable tool. As long as the price remains above trendline support the ETF is creating higher lows and the push higher can potentially continue. If that trendline support is broken though, it warns of a longer-term correction.

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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