Commentary:
After jumping on April 2 the major index ETFs are finishing off this abbreviated trading week in a more sedate fashion. The majority of indexes finished down on the week, although just slightly. The major development is that all four ETFs pierced their upward sloping trendlines which had supported them since at least December. This means that for first time in over three months there is price confirmation that the resistance levels these indexes are facing may be coming into play. Earnings season also kicks off next week with Alcoa (NYSE:AA). With the the complacent climate and steady trend (so far) expect increased volatility in the coming weeks as technical factors come into question and fundamental traders shift positions on earnings announcements.
SEE: The Utility Of Trendlines
The S&P 500 SPDRS (ARCA:SPY) ETF broke below its trendline which has been in place since December 2011. This is a warning signal of a potential reversal, but can also just be a reflection of the more sideways like movement seen since the middle of March. Therefore, a drop below the March 23 low of $138.55 more clearly signifies a further correction is likely forthcoming. Currently the ETF is still holding above support, and therefore, remains in the uptrend making higher highs and higher lows. Monday marked another 52-week high for the pair at $142.21, so further upside cannot be ruled out. The $142 to $144 area is likely to be strong resistance based on long-term and short-term factors. Support in the S&P 500 SPDRS is not until $134.50 with primary support at $130.
Dow Jones Industrial Average SPDR (ARCA:DIA) is finishing lower on the week and also penetrated the upward sloping trendline which was in effect since October 2011. Since the middle of March 2012 the ETF has been moving predominately sideways, which can be used to justify the trendline break. Therefore, the March 23 low at $129.71 is a more reliable indicator of potential weakness. If the ETF moves below that point a further correction is likely, with a target near support at $127. Primary support is $123. As long as the March 23 low holds this is an uptrend though. A new 52-week high was put in on April 2 at $132.68, so it is possible there is more upside left. DIA continues to trade within a long-term resistance zone which extends all the way up to $141.95.
SEE: Support & Resistance Basics
PowerShares QQQ ETF (Nasdaq:QQQ), representing the Nasdaq 100 index has two upward sloping trendlines of interest. The steeper trendline which began in December 2011 was penetrated on April 4 and April 5, but this is not necessarily a sell signal. A drop below the March 15 low of $66.35 is a better indicator of a potential larger reversal. The dominant trendline which began in October does not intersect until $60, and is therefore in no danger at this time. Having put in a recent 52-week high on April 3 at $68.55 further upside cannot be ruled out, but support should be watched closely as volatility is likely to return in the coming weeks. Support is at $65 and $63. Anticipated resistance is at $70 if the ETF moves higher next week.
SEE: Index Investing
Russell 2000 iShares Index (ARCA:IWM) ETF, representing the Russell 2000 index, is finishing down on the week and also broke below its trendline on April 4. Since February 2012 this ETF has been moving sideways, and has experience false breakouts both to the upside and downside. Currently trading very close to the March 23 low at $81.25, a move below that mark is like to trigger more selling resulting in a test of the March 6 low at $78.41. There is significant support anticipated between $77 and $75.50 in the event of a larger decline. Last week the ETF made a swing high at $84.66, therefore, until $84.66 or $81.25 (even $78.41) is significantly penetrated this can be considered a ranging environment.
The Bottom Line
The trend has slowed in the the major index ETFs as recent price action has been more sideways in recent weeks than trending. This has resulting in the price moving through all the upward sloping trendlines, but it is not necessarily a sell signal. A drop below a supportive price level–recent lows–is a better indication of a potentially larger reversal. With earnings season kicking off next week, combined with the currently complacent nature of the market, volatility is likely to pick up next week.
At the time of writing, Cory Mitchell did not own shares in any of the companies mentioned in this article.
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