Financial markets across the globe have been trading within defined trends for the majority of the past several years. The rise in economic uncertainty has triggered a spike in volatility, which has led active traders to start questioning the direction of the primary trend. Recent weakness and sideways momentum does put the multi-year uptrend is in jeopardy, but the price action over the past several trading sessions is suggesting that a bounce higher could be in the cards. In this article, we take a look at three major market exchange-trade funds (ETFs) to try and determine how traders will position themselves over the months ahead. (For more, see: Stocks March Higher Despite Ongoing Risks.)
The S&P 500 is widely regarded as the best gauge of large-cap U.S. equities, and fundamentally, it captures approximately 80% coverage of available market capitalization. Taking a look at the chart of the SPDR S&P 500 ETF, which is the most common exchange-traded product for tracking the price and yield of the S&P 500 index, you can see that it is trading within an extremely strong uptrend. The well-defined uptrend, as shown by the dotted trendline, will likely be used by traders as a gauge for determining the placement of their orders.
The proximity of the combined support of the 200-day moving average and ascending trendline suggest that the uptrend is still secure and that the bias will remain to the upside. The recent pullback seems to now be presenting one of the best risk-to-reward setups in years. Active traders will also take note of the converging trendlines, which are forming a symmetrical triangle pattern. A break above the resistance level would likely trigger a surge of buying pressure and would put the 2018 highs back into reach. A close below the identified support levels will likely be interpreted as an end to the bullish thesis, so the next few trading sessions will prove to be important. (For further reading, see: The S&P 500: The Index You Need to Know.)
The dominance of the United States in areas such as technology often leads fundamental investors to increase exposure to companies that trade on the Nasdaq. The fund of choice for many investors is the Invesco QQQ, which provides exposure to the Nasdaq 100 index. With a weighting of 61.64% in information technology, it is closely correlated to companies such as Apple, Inc. (AAPL), Amazon.com, Inc. (AMZN), Microsoft Corporation (MSFT), and Facebook, Inc. (FB). Taking a look at the chart, you can see that the pattern looks similar to the one shown above. Active traders will continue to maintain a bullish outlook on the Nasdaq for as long as the price trades above the combined support of the 200-day moving average ($155.15) and the ascending trendline. (For more, see: 9 High Growth Stocks for an Uncertain Market.)
The symmetrical triangle pattern is one of the most popular consolidation patterns used in active trading. The converging trendlines outline key areas to place orders. Taking a look at the chart of the iShares Russell 2000 ETF, which is a common benchmark for small-cap American equities, you can see that a symmetrical pattern is in the process of forming. The recent close near the resistance has many traders anticipating a breakout. A close above the resistance would likely trigger a surge in buying pressure, so it will be a chart of interest over the coming few days. (For further reading, see: Buy High, Sell Much Higher.)
The Bottom Line
Increasing volatility across the U.S. equities markets have many investors concerned about the validity of the underlying uptrend. However, based on the charts discussed above, the pullback toward major support levels and clear placements of buy orders could trigger a move higher over the coming months. (For more, see: Why This Bull Market Can't Be Stopped.)
Charts courtesy of StockCharts.com. At the time of writing, Casey Murphy did not own a position in any of the securities mentioned.