NASDAQ 100 ETF TESTS IMPORTANT SUPPORT LEVEL -- INTERNET ETF STALLS AT KEY RETRACEMENT -- ELLIOTT WAVE COUNTS SUGGESTS ABC CORRECTION UNDERWAY IN $SPX -- SETTING HEIKIN-ASHI SUPPORT FOR SPY -- GOLD HOLDS RESISTANCE BREAKOUT
NASDAQ 100 ETF TESTS IMPORTANT SUPPORT LEVEL... Link for todays video. Chart 1 shows the Nasdaq 100 ETF (QQQ) testing support from the mid October lows. Support there stems from two spike lows in October and Tuesdays low. This is an important test because a support break here would reverse the October uptrend. This would also forge a reaction high (peak) below the July peak. A lower high and subsequent support break would show underlying weakness in a leading ETF. The break hasn't happened yet, but this is something to watch going forward. The indicator window shows the Price Relative (QQQ:SPY ratio). Notice how QQQ showed relative strength from mid June to late September as the Price Relative advanced. This ratio formed two equal highs and then broke below the intermittent low. QQQ is suddenly showing relative weakness and not leading the market on the upside.
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Chart 1
FIRSTTRUST INTERNET ETF STALLS AT KEY RETRACEMENT ... Chart 2 shows the FirstTrust Internet ETF (FDN) breaking above its September high and then stalling at the 61.80% retracement. Notice how the ETF broke resistance and then pulled back with a couple of dips below 33. There is a battle raging for control of the trend. So far the breakout is largely holding and remains bullish. The mid October lows mark a support zone that holds the key to this breakout. A move back below these lows would negate the breakout and put the 61.80% retracement back in play. If we then treat the October rally as a corrective move that failed at a key retracement, then a subsequent decline would be considered part of the bigger trend, which is down. Failure to hold the October breakout would clearly have bearish implications. Again, it has not happened yet, which means the bulls still have the upper hand. Just keep an eye on this support level going forward. The indicator window shows the Price Relative stalling near the September highs. A break above the Sep-Oct highs is needed for FDN to show relative strength again.
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Chart 2
ELLIOTT WAVE COUNTS SUGGESTS ABC CORRECTION UNDERWAY IN SPX... It is time to open Pandoras box for a little Elliott Wave analysis. First, note that chart 3 shows the S&P 500 as a 5-day EMA. This EMA smooths the minor fluctuations to highlight the wave structure. I am finding the Elliott count tricky because of the explosive October rally. Such strong moves are considered impulsive, not corrective. An impulse move is in the direction of the bigger trend, while a corrective move runs counter to the bigger trend. Even though the October surge was explosive, the July-August decline still seems more dominant at this stage. Also note that the decline from the early May high shows a clear 5-Wave structure (red 1-5). Elliott Wave theory stipulates that 5-Wave moves are impulsive, not corrective. This suggests that the S&P 500 is in a bigger downtrend at the moment, which opens up two possibilities. First, the S&P 500 could be in the midst of an ABC correction. Such corrections form a 5-3-5 sequence. Wave-A is 5 waves, Wave-B is 3 waves and Wave-C is 5 waves. The October surge, therefore, would be considered Wave-a of Wave-B. The Elliott prognosis would be for a corrective Wave-b now and a subsequent Wave-c to complete Wave-B (blue abc) of a larger degree. Once Wave-B is complete, the S&P 500 would begin Wave-C with a downside target below the autumn lows. The 50-61.80% retracement zone and 2010 lows mark a target zone around 1000-1050.
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Chart 3
And now for the really bearish scenario. The May-October decline forms a 5-wave structure that is Wave-I of a bigger 5-wave decline. This means the current advance is part of Wave-II. As a corrective wave, Wave-II should take on a 3-Wave structure (abc), not a 5-wave structure. Once complete, Wave-III down would commence with a downside target similar to the target mentioned above. The only difference is that Wave-IV and Wave-V would still be expected.
SETTING HEIKIN-ASHI SUPPORT FOR SPY... Chart 4 shows the S&P 500 with Heikin-Ashi Candlesticks, which use two days worth of data to form one candlestick. You can read about these in our ChartSchool Article. By using two days of data, some of the volatility is filtered out and more trend is captured. The basic pattern at work remains unchanged. SPY broke a major support level in early August and then broke a significant resistance level in late October. Which break is the most important? The most recent break and the one that holds are the most important. This means the October breakout is the most important right now - and it remains bullish. Broken resistance in the 122-123 area turns into support and SPY tested this level with a throwback this week. So far the breakout is holding. However, further weakness below 121 would make this a breakout failure and call for a reassessment.
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Chart 4
The indicator window shows 100-period CCI (100 days). Chartists can extend or shorter the timeframe to suit their trading or investing styles. A 20-day CCI would better suit the short-term trend, while a 100-day CCI would be better suited for a medium-term trend. There is never a perfect setting for indicators because there will always be whipsaws and bad signals. These can be reduced by looking for confirmation elsewhere, such as on the price chart or with other non-momentum indicators. In general, a resistance break on the price chart and CCI cross above zero in CCI is bullish, while a support break and CCI cross below zero is bearish. As this chart confirms, a break back below 121 in SPY and 0 in CCI would turn this chart bearish again.
GOLD HOLDS RESISTANCE BREAKOUT... In sticking with the Heikin-Ashi Candlesticks, chart 5 shows the Gold SPDR (GLD) holding its resistance breakout with a bounce this week. The Gold SPDR found support at 155 in September-October. Support in the 153-155 area stems from broken resistance and the recent lows. After a few tests, the ETF broke resistance with a surge in October. Gold was positively correlated with the stock market and the Euro in October. The resistance breakout turned into support with a successful test this week. At this point, I consider the breakout to be bullish until proven otherwise. It is the same with the SPY chart above. A Heikin-Ashi Candlestick that closes below 163 would negate this breakout and be negative for bullion.
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Chart 5
The indicator window shows the Aroon Oscillators. Aroon Up is green and Aroon Down is red. Aroon Up surged to 100 in early October to trigger a bullish signal. There are two ways to counter this signal. First, a move to 100 in Aroon Down would be bearish Second, a parallel decline in both oscillators combined with Aroon Down crossing above Aroon Up would be bearish. Three prior signals are highlighted in yellow. Notice how these two declined with a parallel move in May and Aroon Up surged above Aroon Down for a bullish signal in early June. There was another bullish signal in July and a bearish signal in mid September. You can read more on Aroon in our ChartSchool Article
