DEFINING TRENDS AND TIME-FRAMES - QQQQ FIRMS AT CHANNEL SUPPORT -- IWM IS THE WEAKEST OF THE MAJORS -- SPY TESTS LONG-TERM SUPPORT - DIA PARALLELS SPY

DEFINITIONS FOR TREND AND TIMEFRAME ... Today's Market Message was written by Arthur Hill. John Murphy will be back next week. - Editor

There are basically three time-frames at work in the market. While definitions can, and do, vary, I categorize the short-term, medium-term and long-term time-frames as follows. The short-term covers movements from a few days to a few weeks. The medium-term covers movements from a few weeks to a few months. The long-term covers movements from a few months to a few years. I like to use intraday charts for the short-term analysis, daily charts for the medium-term analysis and weekly charts for the long-term analysis.

Chart 1

Chart 2

Chart 3

There are no hard and fast rules to define these time-frames. More importantly, traders and investors must decide for themselves which time-frame best suits them. Most of my analysis focuses on the medium-term using daily charts. Even so, it often helps to step back and look at the long-term situation. With that in mind, I am going to close the week with an overview of the weekly charts (long-term trends) for the major index ETFs.

Before moving into a discussion on trends, let's lay down some ground rules for trend determination. An uptrend consists of higher highs and higher lows. A downtrend consists of lower lows and lower highs. Even though this is pretty basic stuff, we need to keep this in mind when assessing the various trends. Counter trend movements within the larger trend are deemed corrective. For example: a medium-term downtrend within a long-term uptrend is considered a correction.

QQQQ HITS CHANNEL SUPPORT ... QQQQ remains in a long-term uptrend and the strongest of the major index ETFs. The green arrows show higher highs and higher lows for the entire year (2007). The November decline was drastic, but QQQQ remains well above its closest reaction low (August). The ETF finished the week near support from the lower channel trendline. There is also support in this area from the 40-week moving average, which is equivalent to the 200-day.

Chart 4

With a spinning top candlestick forming this week, I am seeing indecision at support. These candlesticks have small bodies (open-close) with long upper and lower shadows (high-low). The small body shows little change from Monday's open until Friday's close. However, the long upper and lower shadows show some serious volatility during the week. In other words, it was a wild ride last week. QQQQ opened the week at 49.92 and closed the week at 50.28 for a meager 36 cent gain (.007%). However, this week's high was 51.44 and the low was 48.65. The range was $2.79, or 5.5% of the opening price. The range was wide, but the weekly change was small. Spinning top candlesticks show indecision and this reinforces support from the lower channel trendline.

The next chart shows weekly QQQQ with 10-week RSI. This indicator moved below 50 for the third time this year. Notice that QQQQ bottomed soon after moving below 50 in March and again in August (yellow ovals). The key is to wait for a move back above 50 (green dotted lines). Weekly RSI is based on weekly closing prices, which means signals come after the close on a Friday. Mid week signals do not count. A weekly close above this week's high (51.44) would be enough to move RSI back above 50.

Chart 5

IWM FORMS BIG DOUBLE TOP... The next chart shows the Russell 2000 ETF (IWM) and the beginnings of long-term downtrend. In stark contrast to QQQQ, IWM forged a lower low in August and a lower high in October. The inability to move above the summer highs showed relative weakness on the way up. The ETF is already testing support from the 2007 lows and relative weakness continues. The pattern at work looks like a large double top with a ton of support around 74-76. A break below the 2007 lows would confirm the pattern and the downside target would be to the support zone around 64-66.

Chart 6

SPY AND DIA ALSO NEAR MAJOR SUPPORT... The Dow Industrials ETF (DIA) and S&P 500 ETF (SPY) formed similar patterns over the last two years. As the green arrows show, both are in long-term uptrends. Even though both moved to new highs in October, they immediately reversed course and moved sharply lower the last few weeks. DIA is already testing long-term support at 129 while SPY is trading just above long-term support at 142. I elected to draw my support lines through the spike low in August because both ETFs established support with consolidations on either side of the spike low. A break below these key support levels would reverse the long-term uptrends.

Chart 7

Chart 8