XLK AND QQQQ BREAK JUNE HIGHS - THINK BEFORE YOU LEAP - LOW VOLUME A MINOR CONCERN - USO HITS TRENDLINE SUPPORT - EXPONENTIAL MOVING AVERAGES VERSUS SIMPLE MOVING AVERAGES

TECHS CONTINUE TO LEAD ... Link for todays video. The stock market moved higher on Thursday, but participation was a bit more mixed. Eight of the nine sectors were higher with the Financials SPDR (XLF) declining on the day. Technology showed relative strength with the second biggest gain on the day. Chart 1 shows the Technology SPDR (XLK) breaking above its June high on Thursday. The ETF is now up seven days straight. Even though the breakout is a clear show of strength, the ETF is also getting overextended with an 8.5% gain in 7 days.

Chart 1

Chart 2 shows the Nasdaq 100 ETF (QQQQ) edging above its June high on Thursday. QQQQ is up 8.2% in the last seven days and CCI moved above 100 to become overbought. I would consider momentum to be both overbought and bullish as long as CCI remains above +100. Notice how CCI moved above +100 in late May and remained overbought for almost two weeks. QQQQ did not move lower until CCI moved back below +100.

Chart 2

JUMPING ON THE BANDWAGON... If the market has resumed its uptrend and further gains are expected, how is one to jump on the bandwagon? I am not going to give specific advice here, but I can offer a strategy to possibly improve the risk-reward ratio and reduce the chances of whipsaw. With a big move over the last 4-7 days, many securities are short-term overbought. In addition, many are nearing resistance from the May-June highs. One strategy for playing an uptrend involves waiting for short-term pullbacks or oversold conditions. Chart 3 shows the Dow Industrials breaking channel resistance around 8400. A key tenet of technical analysis is that broken resistance turns into support. Therefore, a pullback to 8400-8450 could offer the first pullback chance to partake in the uptrend. Many charts show channel/wedge breakouts and the same logic can be applied.

Chart 3

Momentum oscillators provide a good means to identify oversold conditions. RSI, the Commodity Channel Index (CCI), the Stochastic Oscillator and StochRSI have specific overbought and oversold levels. The sensitivity of these oscillators depends on the number of days. Sensitivity increases as the number of days decreases. 2-period RSI will be much more sensitive than 14-period RSI and will provide more signals. The uptrend started in March, but the first oversold signal did not occur until late April. Since this uptrend began, there have been three oversold signals with StochRSI. These signals occur when StochRSI becomes oversold and then surges above .50 (green dotted lines). Need more signals? Try StochRSI with a shorter timeframe or 2-period RSI.

LOW VOLUME IS A MINOR CONCERN... A reader asked me if low volume on this weeks surge invalidates the move. Chart 4 shows the NY Composite breaking channel resistance with a big move over the last four days, but volume failed to exceed its 200-day SMA. Chart 5 shows the Nasdaq surging with an advance over the last seven days, but volume was above average only two of the seven days. Nasdaq volume was not too bad today as it exceeded 2 billion shares for the third time this month. Low volume is a concern, but it is a secondary concern for now. Even though volume is an important indicator, indicators are secondary to price action. The surge and breakouts over the last few days hold more sway than low volume right now. Failure to hold recent gains and a decline on expanding volume would bring volume to the forefront. While writing this section, I noticed a belated clue on market strength last week. The NY Composite was up the last four days, but the Nasdaq was up the last seven days. Techs showed relative strength early by firming ahead of this weeks surge.

Chart 4

Chart 5

OIL ETF HITS TRENDLINE SUPPORT... After plunging in early July, the US Oil Fund ETF (USO) found support around 32 with a small bounce this week. Chart 6 shows support in the low 30s from the 62% retracement and the February trendline. Broken resistance from the March high (~32) also turns into support. With the sharp decline, USO became oversold as RSI moved below 30 for the first time since mid February. At the very least, it looks like an oversold bounce is underway. Oil could also benefit from further weakness in the Dollar and strength in the stock market.

Chart 6

EMA OR SMA... The S&P 500 is meeting resistance at its 200-day EMA, but bounced off support from its 200-day SMA. The first letter (word) holds the key difference: simple moving average (SMA) versus exponential moving average (EMA). Which is best? Unfortunately, there isnt a clear-cut winner. It is kind of like log scaling versus linear scaling. Preference depends on the user.

As its name suggests, a 200-day simple moving average is simply an average of the last 200-days. In contrast, a 200-day exponential moving average puts more weight on recent data and less weight on older data. For example, the most recent 100-days carry more weight than the first 100-days. This makes the EMA more sensitive to recent data.

Chart 7

Personally, I like to use exponential moving averages for direction and simple moving averages for levels. Allow me to explain. Because recent data carries more weight, exponential moving averages are good for direction. For example, an exponential moving average will turn up or down before a simple moving average. Chart 8 shows the 50-day EMA turning up on 23-March, while Chart 9 shows the 50-day SMA turning up over three weeks later. A rising exponential moving average is positive, while a falling exponential moving average is negative.

Chart 8

Chart 9

As noted above, I like to use simple moving averages for levels. Because a simple moving average represents an un-weighted average of prices over a certain period, it is helpful to know if current prices are above or below this average. When prices are above the 200-day SMA, it suggest that buyers over the last 200-days are making money. This is positive. Conversely, participates are more likely to be losing money when prices are below the 200-day SMA.