Taper Fears Hit A Tired Market

11/21/2013 11:35 am EST

Focus: ETFs

Thomas Aspray

, Professional Trader & Analyst

Two market reversals in a week has made market participants used to its relentless uptrend jittery, but MoneyShow's Tom Aspray notes that even though a significant pullback might be in the works, there is no reason to turn bearish yet.

The release of the FOMC minutes raised the possibility that the Fed may start reducing its bond buying in the next few months. The yields on the 10-year T-note rose sharply to levels last seen in September.

The selling in the stock market was not heavy yet but further “taper tantrums", as I mentioned in August, should create another good buying opportunity in the stock market. The small-cap Russell 2000 Index continues to look the most vulnerable, and despite the S&P 500's longest losing streak in eight weeks, it has not generated any daily sell signals.

The higher rates hit the DJ Utility Average the hardest as it was down 1.4% while the Nasdaq Biotech Index bucked the trend. Gold stocks were hit hard as the bull trap closed over a week ago. Gold is getting oversold and should get an oversold bounce in the next week.

In early trading, the futures are showing nice gains, and without convincing sell signals, there is no reason to turn bearish on the market. Still, this is a market to watch closely as the reversals on Monday and Wednesday are signs of a tired market. A sharply lower weekly close could lead to further profit-taking next week and here are some levels you should be watching.

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Chart Analysis: The daily chart of the Spyder Trust (SPY) shows that is still well above the rising 20-day EMA at $176.97.

  • There is further support at the prior week's low of $176.09.
  • The November low is at $174.76 with the 38.2% Fibonacci retracement support from the October lows at $174.41.
  • The monthly pivot support is at $172.61.
  • The on-balance volume (OBV) did confirm the recent highs, line a, but has now dropped below its WMA.
  • Typically, before the OBV completes a top formation, it will drop further below its WMA and then rebound to the WMA before turning lower.
  • The S&P 500 Advance/Decline also made a new high but then turned lower.
  • The A/D line is still above its rising WMA.
  • A daily close above $180 should signal a move to the daily starc+ band at $182.03.

The SPDR Dow Industrials (DIA) surged above resistance at line d, which now becomes first support.

  • There is next support at $158 with further at $157.05 and the 20-day EMA.
  • There is more important support at the early November low of $154.87.
  • The OBV peaked in July and has so far not been able to move the September high at line e.
  • A drop in the OBV below the October lows would be more negative.
  • The Dow Industrials A/D line has failed to confirm the upside breakout as it has turned down from resistance at line f.
  • The A/D line is still well above its rising WMA.

NEXT PAGE: Signs of a Market Top?

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The iShares Russell 2000 (IWM) had a high on Monday of $111.42, which was just below the prior high at $111.62.

  • It closed Wednesday below the 20-day EMA with the daily starc- band at $$107.15.
  • The August high (line a) and the uptrend, line b, are in the $104.75-$105.75 area.
  • The 38.2% Fibonacci retracement support from the April low is at $102.99.
  • This corresponds closely to the October low of $103.
  • The OBV broke its uptrend, line c, at the end of October.
  • As IWM was approaching the recent highs, the OBV just rallied back to its declining WMA, which is a bearish sign.
  • The Russell 2000 A/D line has formed lower highs but has not technically formed a divergence.
  • The A/D line needs to move back above its WMA to turn positive.
  • There is initial resistance at $110.62 to $111.62.

The weekly chart of the PowerShares QQQ Trust (QQQ) shows that it formed a doji two weeks ago with a low of $82.40.

  • Therefore, a weekly close below this level would trigger a low close doji sell signal.
  • The QQQ closed Tuesday at $82.70.
  • The 20-week EMA is rising sharply at $79.05, which is a sign of strength.
  • The daily OBV (now shown) has dropped below its WMA but did confirm the recent highs.

What It Means: If a market top is building, it may take some time before the market starts a meaningful downtrend. There are still stocks that are basing near support and just need a positive technical reversal, like Tyson Foods (TSN), that was recommended last week, to confirm they have bottomed.

These stocks are likely to hold up the best during a correction and unlikely to violate the recent lows. Be sure you keep monitoring your positions and adjust your stops as I did early in the week for the Charts in Play portfolio.

How to Profit: No new recommendation

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