ETF Trading Ideas for an Uncertain Market

08/09/2010 11:13 am EST

Focus: ETFS

I find it amazing how many traders do not use volume as a factor in their trading decisions. I believe it’s always important to track the volume no matter which time frame you are trading simply because it tells you how much interest there is for that investment at that given time and price level. If you use volume and understand how to read it when located at the bottom of the chart—which is the standard way of reading it—then you’re well ahead of many traders and just may find this little volume indicator helpful.

Price and volume are the two most important aspects of trading, in my opinion. While news and geopolitical events cause daily blips and on rare occasions change the overall trend of an investment, more times than not, it’s better to just trade the underlying trend. Most news and events cannot be predicted, so focusing on the price action and volume helps tell us if investors are bullish or bearish for any given investment.

Below are a few charts showing the volume-by-price indicator in use. Reading this indicator is simple: The longer the blue bars, the more volume has traded at that point. High volume levels become key support and resistance levels.

S&P 500 Exchange Traded Fund (SPY)

As you can see on the chart below, I have pointed out key support and resistance levels using the volume-by-price indicator. The thin red resistance levels would be areas where I would be tightening my stops and/or pulling some money off the table.

The S&P 500 is currently trading at the apex of this wedge. The market internals as of Friday were still giving a bullish bias, which should bring the index up to resistance once more on Monday or Tuesday. From there we will have to see if we get another wave of heavy selling or a breakout to the upside.

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Gold Exchange Traded Fund (GLD)

Gold has the opposite volume-to-price action as the S&P 500. We are seeing a lot more overhead resistance, and that’s going to make it tough for gold to make a new high anytime soon.

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Crude Oil Trading Fund (USO)

Crude oil broke out of is rising wedge last week and has started to drift back down as traders take profits. Many times after a breakout, we will see prices dip down and test that breakout level before continuing in the trend of the breakout. I should point out that there is a large gap to be filled from last Monday’s pop in price, and we all know most gaps tend to get filled.

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US Dollar Exchange Traded Fund (UUP)

The dollar has been sliding the past two months and it’s now trading at the bottom of a major support level. If the dollar starts to bounce, it will put some downward pressure on stocks and commodities.

Click to Enlarge

In short, I feel the market has a little more life left in it. I’m expecting one to two more days of bullish/sideways price action, and after that, we could see the market roll over hard. It’s very likely the US dollar starts a significant rally, which will pull stocks and commodities down.

With the major indices and gold trading at key resistance levels, traders/investors are ready to hit the sell button, and with the dollar at a key support level, I think it’s only a matter of time before we see a sharp snapback. That being said, there is one scenario that is bullish and could still play out. That would be if the US dollar starts to flag and drift sideways for a week or so, and for stocks and commodities to also move sideways before taking another run higher. Watching the intraday price and volume action will help us figure out if buyers or sellers are in control this week.

By Chris Vermeulen of
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