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.

Related Articles
  1. Mutual Funds & ETFs

    Top 5 Japan Mutual Funds

    Discover five of the most popular and best-performing mutual funds offering investors direct exposure to equities of Japanese companies.
  2. Mutual Funds & ETFs

    ETF Analysis: BioShares Biotechnology Clinical Trials

    Learn more about the BioShares Biotechnology Clinical Trials Fund, a new and innovative fund focusing on breakthroughs in the health industry.
  3. Mutual Funds & ETFs

    ETF Analysis: First Trust NYSE Arca Biotech

    Learn more about the First Trust NYSE Arca Biotechnology Fund, a highly rated exchange-traded fund in the biotech space.
  4. Mutual Funds & ETFs

    ETF Analysis: PowerShares KBW Bank

    Consider an examination and analysis of the PowerShares KBW Bank Portfolio ETF, considered one of the primary financial sector ETFs.
  5. Chart Advisor

    3 Ways to Trade the Rising Volatility

    With volatility increasing in the markets, many are turning to these three volatility-capturing exchange-traded products.
  6. Mutual Funds & ETFs

    ETF Analysis: iShares US Basic Materials

    Learn about the iShares US Basic Materials exchange-traded fund, which invests in the equities of chemicals, metals and industrial gas companies.
  7. Chart Advisor

    Big Double Top Patterns On the Verge of Breaking

    These stocks have created big double top chart patterns, and are on the verge of breaking the patterns to the downside--a bearish signal.
  8. Mutual Funds & ETFs

    ETF Analysis: Ultra Oil & Gas

    Find out more about the ProShares Ultra Oil & Gas exchange-traded fund, the characteristics of the ETF and the suitability and recommendations for the fund.
  9. Mutual Funds & ETFs

    ETF Analysis: PowerShares DB Commodity Tracking

    Find out about the PowerShares DB Commodity Tracking ETF, and explore a detailed analysis of the fund that tracks 14 distinct commodities using futures contracts.
  10. Mutual Funds & ETFs

    ETF Analysis: PowerShares FTSE RAFI US 1000

    Find out about the PowerShares FTSE RAFI U.S. 1000 ETF, and explore detailed analysis of the fund that invests in undervalued stocks.
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. Tame Panic Selling with the Exhausted Selling Model

    The exhausted selling model is a pricing strategy used to identify and trade based off of the price floor of a security. ... Read Full Answer >>
  2. Point and Figure Charting Using Count Analysis

    Count analysis is a means of interpreting point and figure charts to measure vertical price movements. Technical analysts ... Read Full Answer >>
  3. 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 >>
  4. 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 >>
  5. 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 >>
  6. 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 >>

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!