The State of ETFs – June 6, 2011 – The Week Ahead

As of the close of June 3, 2006, there are six changes in the ETF trend state table in relation to the close of the previous week. However, two of those changes are very important and may signal the beginning of a new period in the markets. Also, the longer term trend of all ETFs, and that includes ETFs for stock indices, metals, currencies, commodities and bonds, is still up but we may be getting close to a point that this phenomenon, i.e. the phenomenon of everything trending up longer term, is about to end. We noticed last week that the market and the dollar fell, contrary to the prevailing paradigm of market falling – dollar rising and vise versa. As I noted in the beginning of last month, it may be that the financialization of commodities is coming to an end.

Please note: I am not sure if I will be able to continue publishing this weekly report. If this blog suddenly goes down I would like to thank you very much for your emails with your comments and your support. 

ETF Short-term Medium-term Longer-term OB/OS
SPY DN- DN- UP    
QQQ DN- DN- UP  
GLD UP UP UP  
SLV DN- DN UP  
FXE UP+ DN UP  
TLT SW UP UP  
USO SW DN UP  
DBC UP SW UP  

SW” indicates no trend, ”+” indicates a new upward trend change,   “-” indicates a new downward trend change, “OB” means overbought and “OS” means oversold. “OB-” means close to becoming overbought and “OS+” means close to becoming oversold.    

Summary of trend changes and comments: SPY and QQQ, the stock index ETFs, are now on a short and medium-term downtrend. This is an important change because it may be an early signal of a new bear market to come. However, as I have noted before, we are not very close to a trend reversal in S&P 500 Index. Actually, we can start talking about a medium-term trend reversal in this important index after it tests the 1,250 level and its up-trendline from the low of 2009.  

GLD remained on its up-trending motion but SLV still struggles above its up-trendline from August of last year and it is now on a short-term downtrend. FXE continued on its strong uptrend towards closing the gap left behind on 05/05/2011 and possibly then making new highs. The US government seems reluctant to support the USD because of pressure from multinational corporations mainly and export lobbies.  At the same time, gasoline prices, which are highly correlated to the exchange rate of USD are becoming the second largest expense of US households. In my opinion the optimum balance point has long been violated and at this point this policy is to the advantage of few at the expense of many. However, the biggest risk is another uncontrollable rise in commodity prices and a collapse of the stock indices that can fuel another financial crisis. Maybe at the FED they underestimate Chaos Theory and bifurcations, i.e. the possibility of hidden modes of instability getting triggered because of this policy and things getting uncontrollable. How can this happen in reality? It can happen, if suddenly, for example, a large nation, like China or India, gets spooked by this USD policy and orders massive quantities of raw commodities while at the same time speculators rally the futures sky high. I think the EURUSD exchange rate is close to critical levels at this point that can cause irreparable damage to the world and US economy if let slide further.

TLT is taking a break after rallying above its 200-day simple moving average. If a trend is very strong and market participants have no doubts about the future direction, normally trend reversals of this kind are not followed by several retests of the average. In this case, market participants are a bit skeptical it seems. On one hand, the debasing of the USD by massively printing money points to higher inflation. On the other hand, another financial crisis may cause a flight to quality of a sort and bond prices may rise. The final resolution of this conflict will take place during this summer I believe.

No overbought/oversold levels this time around but maybe by next week’s close there will be triggers, especially if SPY and QQQ continue to slide and FXE continues to rally.

SPY

SPY is testing the lower trendline of the down channel that started late April of this year. There is week support near $129 although strong support is at $126, which is also close to the March low and the value of the 200-simple moving average.

The MEI, my proprietary indicator, is moving decisively below the zero line towards levels attained last March when the market bottomed around $126 and then rallied to new highs. If SPY gets close to those levels the RSI may also signal an oversold conditions and the market will rebound. At this point in time we cannot know what kind of a rebound we will get, whether that will be a small correction in a developing bear market or a signals for a resumption of the uptrend.

Also, it is worth noticing that the triangle formation shown on the chart is currently acting as a reversal signal, something rare but possible.

QQQ

QQQ broke below its medium-term trendline on Friday. The triangle formation seems to have served as a trend termination pattern. Short-term support is near $56 and $55.30, the low of April of this year. Longer-term support is near the value of the 200-day simple moving average, which also agrees with the low of March of this year, around $54.20.

The MEI is dropping fast towards levels reached near the low of March of this year but it is early to say whether these levels will serve as a springboard for another leg up. As in the case of SPY, if the $54.20 level is reached oversold conditions may cause a reaction to the upside but the magnitude cannot be known at this point.

SLV

The silver ETF is struggling to keep above its longer-term trendline T1. It failed this past week to test its 30-day simple moving average and plunged towards the $34 level. The MEI is also struggling to stay above the zero line. Based on the behavior of this indicator it is possible that SLV will move towards support at $30 in the next couple of weeks. That level is near the value of the 200-day simple moving average value.

However, this market requires careful monitoring. The double top formed just below $38 can easily be transformed into an inverse heads & shoulders pattern if support at $34 holds. In that case it will be a classic h&s bullish formation with a right shoulder higher than the left shoulder.

Have a good trading week!                         

The above analysis was based on 3 different methodologies:                                  

  • Technical Analysis – (mainly trend lines, moving averages and overbought/oversold indicators)
  • P-indicator calculations - (short/medium/longer-term correspond to small/medium/large  target and stop values)
  • MEI Indicator readings - This is a new technical analysis indicator for measuring trend/momentum/oversold/overbought conditions

Charting program: Amibroker (Charts created with AmiBroker – advanced charting and technical analysis software. http://www.amibroker.com/”)   

Disclosure: no relevant positions.

Disclaimer: The author is not a financial advisor and does not recommend the purchase of any security or advise on the suitability of any trade or investment in any timeframe. ETF, stock, futures, forex and options trading and investing involves substantial financial risks and can result in total loss of capital. If investment or other professional advice is required, a licensed professional should be consulted.

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