The State of ETFs – July 11, 2011 – The Week Ahead

As of the close of Friday, July 8, 2011, there are 7 changes in the ETF trend state table in relation to the close of the previous week. Four of the changes regard the short-term trend and two changes apply to the medium-term trend. There is one change in a longer-term trend. The two stock index ETFs tracked are in a strong rally and the two metal ETFs are following. No significant overbought or oversold conditions are present at this point.

ETF Short-term Medium-term Longer-term OB/OS
SPY UP UP UP    
QQQ UP UP UP OB-
GLD UP+ SW+ UP  
SLV UP+ SW UP  
FXE DN-  SW UP  
TLT UP+ DN DN  
USO UP SW DN  
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: GLD is now on a short-term uptrend and the medium-term motion has been upgraded to sideways from down. SLV is also on a short-term uptrend. FXE is on a short-term downtrend, downgraded from sideways motion. TLT made significant gains on Friday and it is now on a short-term uptrend. Finally, the medium-term trend of DBC has been upgraded to sideways from down and its longer-term uptrend is now up.

As far as overbought/oversold conditions, only QQQ is nearing overbought levels.

QQQ

QQQ is now testing important longer-term resistance at $59.34. On Friday it closed the gap left behind from Thursday by making a classic move that offered good profits to experienced technical traders. The 14-day RSI is getting close to overbought levels, currently at 67.19 but there is still room for a rally that will take out plenty of stops above mentioned resistance level. The MEI has been on a strong uptrend for the last two weeks and it does not show signs of a pending reversal. Since this market is now at extreme levels, anything can happen, including a violent correction that will be triggered by fundamental factors although the technical picture suggest a further rise.

SLV

After the huge drop in the beginning of May, SLV has been moving sideways inside a horizontal channel with an upper line at $37.85. After crossing its 30-day moving average last week, it seems that there will be soon a test of that upper line. The 14-day RSI has just crossed to 50% line and the 14-day MEI just broke above the zero line, both suggesting momentum is building up. I would be surprised if this market does not test the $37.85 level soon , which is $2 away the close of Friday, a respectable move. 

FXE

A classic five-leg symmetrical triangle, as shown on the chart, has been developing in FXE. This is usually a continuation pattern. However, in rare cases these triangles signal the completion of a trend. As it is indicated by the two red arrows, FXE is very close now to breaking out of the triangle towards any of the two directions. The upside has much higher probability than the downside but probabilities is a very dangerous game for those that do not understand what they mean and I must admit I have met many that belong to this camp.

The possibility of another round of QE after the weak employment numbers is putting pressure on USD. At the same time, there are structural problems in Europe. At least three countries cannot pay their obligations without aid and the list may get longer. Fundamental factors are more important than technical in the currency markets. A probability of 0.85 for a rally based on technical analysis may be much worse than a probability of 0.55 for a drop based on fundamental factors. This is one more reason why trading is difficult and in general an exercise in futility for those that do not fully understand probability theory and especially the many interpretations and definitions of probability.  

Successful trading based on probabilities requires consistency both in the analysis and the interpretation of the results. Otherwise it becomes gambling activity.

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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