Put on Your Rally Cap

11/03/2008 4:41 pm EST

Focus: ETFS

Jim Farrish

Founder and CIO, Jim's Notes

Jim Farrish, editor of SectorExchange.com, likes the short term outlook as the market bounces off support.

Last week I discussed the potential opportunity if we held the October 10th lows.

Well, they did bounce, with the Standard and Poor’s 600 Small Cap Index gaining 17.4%, the S&P 500 rose 13.9%, the Dow Jones Industrial Average gaining 13.7%, and the Nasdaq Composite index up 10.8%. With the exception of gold, you would be hard pressed not to find winners in every sector with double-digit gains.

Yes, the market was in an extremely oversold state technically, but that kind of broad market bounce also shows that volatility is alive and well. Money flow rose nicely throughout the week as investors and institutions found reasons to put money to work.. The primary question remains how long will it last and how high will we move?

A look at one Chart-of-the-Day from last week shows that we have started a short-term rally off the recent lows. My target for the move is the previous lows or supports prior to the October bashing of stocks. For example, the Dow closed at 9,325 on Friday and the resistance point would be 10,350.

A look at the moving averages shows the 20-day EMA (exponential moving average) to be important. I want the price to close above this point as my first indicator. The 10- day EMA is turning positive, confirming the bounce has short-term momentum. A cross of the 10-day EMA above the 20-day EMA would further confirm the momentum.

The short-term down trend lines are being broken to the upside on many of the charts. This again shows short-term momentum. Volume has been solid on the upside and in most cases above average. The CBOE Volatility Index (VIX) has moved back below the 60 mark. I look for a move lower towards 50 and potentially as low as 36, depending on the momentum with the current move higher.

If these parameters remain in place the following table highlights the major index ETFs and the major sector ETFs with some notes on what I am looking to happen in the short run. Some have already broken through and would be short-term plays and some still to need to make their respective moves through resistance. 

Symbol

Description

Last

52 Wk High

52 Wk Low

Notes

           

IJR

iShares S&P SmallCap 600 Index

47.53

76.00

39.09

Break of downtrend line and 20 day EMA would help my interest

SPY

S&P Dep Receipts

97.14

152.89

83.58

Looking for move above 98.75 or retest of lows

MDY

S&P Midcap Dep Receipts

103.33

163.34

85.27

Nice bounce off the lows finally. Need break above the 20 day EMA

XLY

S&P Sel Consum Discretion’y Sp

22.98

36.37

18.52

Looking for break above 22.50 or retest of the lows.

XLP

S&P Sel Consum Staples Spdr Fu

24.00

30.29

21.63

Looking for break above 24.80 and the 20 day EMA

XLE

S&P Sel Energy Spdr Fund

51.05

91.42

38.84

Looking for a break above 50.50 with a target at 57

XLF

S&P Sel Financial Spdr Fund

15.50

32.49

12.79

Break above the 20 day EMA would be good start

XLV

S&P Sel Health Care Spdr Fund

26.60

37.89

22.89

Consolidation wedge - look for upside momentum or retest of lows

XLI

S&P Sel Industrial Spdr Fund

24.92

40.82

21.24

Looking for break above 25.20 with target of 27.80

XLB

S&P Sel Materials Spdr Fund

25.92

46.54

21.20

Nice bounce finally - need to break above the 20 day EMA - target of 30

XLK

S&P Sel Technology Spdr Fund

16.74

28.37

14.29

Looking for a move above 17.25 or retest of the lows.

XLU

S&P Sel Utilities Spdr Fund

28.91

44.66

23.28

Looking for break above 30 and target of 32.25

We bounced off support of the October 10th lows for a second time last week, and I’m looking for a higher bounce than the last attempt. But you need to define your entry, exit, and target levels before taking any plays short term. The view here is purely technical and focused on a short-term bounce. This move could last three to six weeks, and we could test the move higher several times during the process. Thus, the need to be disciplined and have a strategy for how you play any positions short term. This chart is updated nightly on SectorExchange.com if you would like to follow along as these plays develop.

Jim Farrish, founder and editor of Melbourne, Florida-based SectorExchange.com, writes regularly about sectors and speaks widely about investing and money management.

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