Traders Bracing for Reversal—Opportunities Here

08/27/2009 10:27 am EST

Focus: STRATEGIES

S. Wade Hansen

Co-Founder, Profiting with Forex (PFX) and Learning Markets

The S&P 500 (.INX) and the Dow Jones Industrial Average (.DJI) ended the day right at about the same level as they started the day as investors wait to see what will happen to US stocks after the GDP announcement on Thursday.

  • The Dow Jones Industrial Average (DJIA) was up 4.23 points, or 0.04%, at 9,543.52
  • The S&P 500 (SPX) was up 0.12 points, or 0.01%, at 1,028.12
  • The Nasdaq (.IXIC) was up 0.20 points, or 0.01%, at 2,024.43

Because both the S&P 500 and the DJIA are dominated by large-cap stocks that are affected by the health of the general economy, stock traders are especially eager to see if the gross domestic product (GDP) will show signs of economic recovery during Q2 2009. Here's what to look for:

A better-than-expected GDP number should help lift the S&P 500 and the DJIA to new highs. Conversely, a worse-than-expected GDP number will most likely push the S&P 500 and the DJIA down off of their current price levels.

Of course, the GDP number may come in just as everyone is expecting it to, and we might see the S&P 500 and the DJIA stay right where they are.

Investing in the Indices

As you watch the major US stock market indices, you may decide you'd like to invest in each index as a whole, regardless of whether it is going up or down. If that's the case, consider these exchange-traded funds (ETFs): the SPDR S&P 500 ETF (SPY), the ProShares Short S&P 500 ETF (SH), and the Diamonds Trust Series 1 ETF (DIA).

The SPDR S&P 500 ETF (SPY) is a fund that, before expenses, generally corresponds to the price and yield performance of the S&P 500 Index.

The ProShares Short S&P 500 (SH) seeks daily investment results, before fees and expenses, which correspond to the inverse (opposite) of the daily performance of the S&P 500 Index.

The Diamonds Trust Series 1 ETF (DIA) seeks to provide investment results that, before expenses, generally correspond to the price and yield performance of the Dow Jones Industrial Average.

Stock Market Breadth Indicators

The market breadth indicators we watch (see charts below) are showing us that stock traders are bracing themselves for a potential turnaround in the S&P 500 and the DJIA.

NYSE Bullish Percent Index

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Put / Call Ratio

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NYSE Advance / Decline Line

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NYSE Highs-Lows Line

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By S. Wade Hansen of LearningMarkets.com

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