Sell the Rumor and Buy the News?

09/18/2014 10:20 am EST

Focus: ETFS

Thomas Aspray

, Professional Trader & Analyst

With Wednesday’s close, though the major averages did close higher, they gave up much of their post FOMC meeting gains, so MoneyShow’s Tom Aspray looks at the technical evidence and how a market leading ETF reacted to other FOMC meetings in 2014 to determine if the correction is over.

The markets appear to have survived the long awaited FOMC meeting as the financial media has been obsessed over what the Fed may or may not say. Much of the selling in the past week seems to have been related to speculation that the wording of their announcement would change.

Some may end up regretting their selling as I speculated Monday that it was maybe “a sell the rumor and buy the news situation.”  Having a plan and sticking to it will help you avoid emotional selling. Though the major averages did close higher, they gave up much of their post meeting gains. The S&P 500 was showing double digit gains but closed up just 2.60 points.

The market internals were pretty much flat as the McClellan oscillator rose only slightly to -108. A strong close above the +40 level would be bullish. In early trading, the S&P futures are showing nice gains as are the EuroZone markets. With Wednesday’s close, the technical evidence had not confirmed that the correction was over but in my estimation the odds are about 60/40 that it is over.

A strong close either Thursday or Friday will shift the balance of evidence in favor of a new uptrend. Let’s look at the technical evidence and also how the market leading PowerShares QQQ Trust (QQQ) has reacted to the other FOMC meetings in 2014.

chart
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Chart Analysis: The Spyder Trust (SPY) shows Wednesday’s wide range and the formation of a doji.

  • The resistance that connects the July and early September highs is now in the $202 area with the daily starc+ band at $202.74.
  • The monthly projected pivot resistance is at $207.63.
  • There is minor support at $198.38, which was Monday’s low.
  • The monthly pivot is at $197.36 with the monthly projected pivot support at $193.90.
  • The S&P 500 A/D line has edged slightly above its WMA as it turned higher after testing the support at line b.
  • The A/D line did make a new high in early September.
  • The daily on-balance volume (OBV) has moved back above its WMA but is still below the bearish divergence resistance, line c, that goes back to late July.
  • There is good OBV support at line d and the weekly OBV is positive.

The SPDR Dow Industrials (DIA) made a new high yesterday as the resistance at line e, was overcome.

  • The daily starc+ band is now at $172.82.
  • The weekly, along with the quarterly projected pivot resistance, are in the $175.34 area.
  • There is minor support now at $170.93 with the 20-day EMA at $170.20.
  • A close below last week’s low of $169.40 would return the focus on the downside.
  • The Dow Industrial A/D line has moved strongly back above its WMA and is not far below its all time high.
  • The volume Wednesday was double the daily average and the OBV is rising sharply.
  • The downtrend in the OBV, line f, has been broken but the OBV is still below the July high.
  • The weekly OBV (not shown) will make a new high this week with a positive close.

NEXT PAGE: Watch How This ETF Reacted to Other FOMC Meetings in 2014

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chart
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The Powershares QQQ Trust (QQQ) is up 14.9% YTD as it made new highs for the week on Wednesday.

  • The daily starc+ band and the quarterly pivot are in the $101.30 area.
  • The monthly projected pivot resistance is at $103.88.
  • The monthly pivot at $97.86 was almost reached at Tuesday’s low.
  • The support from the July high (line a) and the uptrend, line b, are in the $97.50 area.
  • The Nasdaq 100 A/D has turned up but is still slightly below its WMA.
  • The daily OBV has moved back above its WMA, which is a positive sign.
  • The prior FOMC meeting periods have been highlighted on the chart.
  • In March, the QQQ held up well for a few days but reversed to the downside the following Monday.
  • At the time, the A/D was in a solid downtrend (line c) and just barely made it back to its WMA.
  • The OBV was already in a well established downtrend, line d, and had made a series of lower lows.
  • At the June meeting, the QQQ was in a sideways range.
  • Both the A/D line and OBV were in solid uptrends (see arrows), which was a positive sign.
  • As for the current situation, the chart is more similar to March.
  • The technical studies, however, do look more positive as they are still in uptrends but not as strongly as they were in June.

What it Means: It will be important for the next two days to keep an eye on the market internals as one day with 3-1 positive A/D numbers will be a strong sign that the correction is over.

Conversely, if the market rallies on just slightly positive A/D numbers, it will suggest that the trading range is not over yet.

How to Profit: Should be long the PowerShares QQQ Trust (QQQ) $86.88 and would add a 25% long position in at $97.52 or better, stop at $92.89.

On September 23, I will be giving a Webinar on FX trading techniques. If you would like to join me sign up here.

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