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The rally in the PowerShares QQQ Trust (QQQ), which tracks the Nasdaq 100 index, has been the most impressive, up over 13% from last week’s lows. There is further resistance at $58 with the daily Starc+ band at $58.36.

• The 2011 high is at $59.83 with the weekly Starc+ band now at $60.54


• The Nasdaq 100 A/D line has broken its downtrend, line c, but has not yet surpassed the September highs
  
• The A/D line did form a positive divergence at the recent lows, line d


• The daily OBV (not shown) is positive, as volume was much lower last week than at the August lows


• There is initial support at $55-$55.50 and stronger support at $54-$54.60 and the 20-day EMA

Even the lagging iShares Russell 2000 Index Fund (IWM) has overcome its first resistance (line e) but is still well below the mid-September high at $72.03. IWM made a high in late August at $73.89.

• The Russell 2000 A/D line has broken its well-established downtrend, line g, which goes back to the July highs. It did not form a positive divergence at the recent lows


• A move in the A/D line above the late-August high (see arrow) will be much more positive


• The relative performance, or RS analysis (not shown), indicates that both the mid and small caps are still lagging the S&P 500


• There is first support for IWM at $67-$67.40 with much stronger support in the $65-$66 area

What It Means: The patterns in the A/D lines, including the NYSE A/D line, are consistent with the formation of a significant stock market bottom. This should set the stage for a strong rally into year end, but prices will need to move much higher to get the public interested in stocks again.

The A/D ratios on a correction or dip will be important, as the A/D lines need to develop a pattern of higher lows and higher highs to signal upward acceleration. Remember that buying the dip refers to purchases that are done at previously defined chart support or Fibonacci price levels. Of course, stops need to be placed at the same time as the buy orders so that trading risk is clearly identified.

How to Profit: Of the four index ETFs, the PowerShares QQQ Trust (QQQ) looks the most attractive. Go 50% long QQQ at $54.93 and 50% long at $54.06 with a stop at $49.74 (risk of approx. 8.6%). On a move above $58.60, raise the stop to $53.66.

For the Spyder Trust (SPY), go 50% long at $117.54 and 50% long at $115.10 with a stop at $112.12 (risk of approx. 3.6%). On a move above $124.70, raise the stop to $115.40.

For the SPDR Diamonds Trust (DIA), go 50% long at $112.34 and 50% long at $110.16 with a stop at $106.74 (risk of approx. 4.1%). On a move above $117.10, raise the stop to $109.54.

There is no recommendation for the iShares Russell 2000 Index Fund (IWM) at this time.