Sellers In Charge Now, but...

10/02/2014 10:30 am EST

Focus: ETFS

Thomas Aspray

, Professional Trader & Analyst

Untitled Document

Over the next few weeks, bearish sentiment is likely to build, a selling climax is possible at any point, and the weight of the evidence makes a strong rally likely, so MoneyShow's Tom Aspray studies the charts of several major ETFs to determine what investors should do next.

It was an ugly start to the new month with the Dow Transports losing 2.5% as the airline stocks were hammered over the new Ebola fears. Delta Air Lines (DAL), Southwest Airlines (LUV), and JetBlue Airways (JBLU) were all down around 3.5% on the day.

Though these fears may hurt travel in the near term, little attention has been made to how plunging energy prices should clearly help their bottom line in the future. The oil service and semiconductor stocks were also down a similar amount, which was much worse than the 1.36% decline in the Spyder Trust (SPY).

As I pointed out in yesterday's Monthly Analysis of Big Biotech, a break out of the short-term trading range was likely to trigger another 1+% move. Wednesday's sharp break is likely to trigger more follow-through selling as-once again-the EuroZone markets are lower as are the US futures.

The bullish sentiment has declined a bit as the latest AAII survey shows the bullish% dropped from 41.84% to 35.42% while there was just a 2.7% increase in the bearish%.

Poor manufacturing data out of Germany was followed by a weaker-than-expected ISM Manufacturing Index even though it is still in solidly positive territory. Traders are now waiting for today's ECB meeting to see if they will take more aggressive action to reverse the slowing in the EuroZone economies.

The drop in the NYSE Composite back to its August low does require close watching. The weight of the evidence makes a strong rally likely in the next week, so what should investors do?

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Chart Analysis: The NYSE Composite dropped slightly below the August 7 lows in Wednesday's session.

  • The chart shows that the 38.2% Fibonacci support level from the February lows has been slightly violated.
  • The 50% support is at 10,422 with the 4th quarter projected pivot support at 10,408.
  • The NYSE Advance/Decline Line is also testing the August low, line c.
  • The gap between the A/D line and its WMA is similar to what we saw in early August.
  • The A/D line needs to move back above its WMA to stabilize the outlook from the market internals.
  • A move in the A/D line above resistance, at line b, would be needed to signal that the correction is over.
  • The McClellan oscillator has not yet made new lows as it closed Wednesday at -214.
  • This is above last week's low of -244 so a bullish divergence could be forming.
  • There is initial resistance now at 10,750 with the declining 20-day EMA at 10,870.

The Spyder Trust (SPY) is now down 3.7% from the September high at $201.90. It closed on the daily starc- band on Wednesday as the weekly is also being tested.

  • The SPY is still 2.4% above the August low at $189.66, line f.
  • The quarterly projected pivot support is at $190.49.
  • The daily divergence in the S&P 500 A/D line warned of a correction, but, so far, the A/D line is well above the August low at line h.
  • The A/D line has near term resistance at its WMA with more important at the bearish divergence resistance, line g.
  • The daily on-balance volume (OBV) does look much more negative as it is well below the August lows, line i.
  • The weekly OBV (not shown) is still above its rising WMA.
  • There is initial resistance at $196.19 and the quarterly pivot.
  • There is stronger resistance at $198.16 and the declining 20-day EMA.

Next Page: Two More ETFs to Watch


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The PowerShares QQQ Trust (QQQ) dropped 1.6% in Wednesday's session and is now down 3.3% from its high at $100.56.

  • There is next support in the $95.50-$96 area along with the daily starc- band.
  • The weekly starc- band is at $95.07 with the quarterly projected pivot support at $94.61.
  • The 38.2% Fibonacci support from the April lows is at $93.68, which also corresponds to the August low.
  • The more important 50% support is at $91.59.
  • The Nasdaq 100 A/D line formed a negative divergence at the September highs, line b, and is below its WMA.
  • The A/D line is well above the breakout level, line c, and the August lows.
  • The daily OBV shows a short-term negative formation as it almost reached its declining WMA on Tuesday before turning lower.
  • The OBV has dropped below the September lows but also above the breakout level.
  • The 20-day EMA is at $98.74 with further at $99.50.

The iShares Russell 2000 (IWM) has dropped back to the May lows as it continues to act the weakest of the four ETFs, down over 10% from its high.

  • The monthly projected pivot support is at $103.66.
  • The major 38.2% Fibonacci retracement resistance from the 2012 lows is at $101.45.
  • The Russell 2000 A/D line has dropped below the August lows.
  • The A/D line is below its declining WMA and has three month resistance at line f.
  • The OBV has reversed sharply from the September highs as it has dropped below the support at line h.
  • The weekly OBV (not shown) has dropped below the August lows and is now in a clear downtrend.
  • There is initial resistance now in the $110-$111 area with the sharply declining 20-day EMA at $112.53.

What it Means: The market decline so far this week has been more severe than I expected but it does not change my longer-term outlook. However, until there are positive signs from the daily studies, the major averages can certainly still go lower.

Many stocks are still holding up well and have not yet violated important support. The bearish sentiment is likely to build over the next week or so and a selling climax is possible at any point.

Investors should stick with their plan and observe your stops. I think that selling out any long term stock holdings will be regretted by yearend.

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

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