Key Price Levels: December 29, 2008

With prices failing at support on the QQQQ (NASDAQ 100 proxy) and IWM (Russell 2000 proxy), the price action is very mixed. Two weeks ago, the QQQQ and IWM barely and unconvincingly closed above resistance, and this became support, which has not held this past week. The break down wasn't convincing either, but this is the hand we are dealt - a low volume, news driven market. The SPY (S&P500 proxy) and DIA (Dow Industrial proxy) have been above key levels for several weeks now but have failed to clear the next level up.

Before looking at the charts to see the areas where the major indices will succeed or fail, let me give you some words on how to use these levels. As we all know, nothing is ever written in stone when it comes to the market. These key levels have been shown (via the back testing process) to be important areas of buying and selling. They are like road signs directing us to certain price criteria that must be maintained to meet the bullish (or bearish) case. So if the IWM closes the week below 47.58 (the nearest key price or support level), then I would say that this is a bearish development. As it turns out, the IWM closed the week at 47.55. Now I can also understand how one might want to wait before closing out their position as it doesn't seem intuitive that positions should be closed out based upon a penny or two. If this is the case, I would remain cautious; however, I would not stray too far from the methodology. Any downside pressure should be considered real. This approach would be consistent with my "11 Rules For Better Trading". Be data centric. Be disciplined but flexible!!

Key price levels are points where buying and selling are most likely to take place. With over 40 years of back tested data, I have defined these key price levels as a pivot point low occurring at a time when investor sentiment is bearish (i.e, bull signal). These key areas are shown with the red dots in figure 1, a weekly chart of the ETF proxy for the S&P500, the S&P Deposit Receipts (symbol: SPY).

Figure 1. SPY/ weekly

Now let's stay with figure 1, and focus on the price bars with the red labeling. These are positive divergence bars between a momentum oscillator and price. Positive divergence bars tend to occur at market bottoms and are of indicative of decreasing downside price momentum. They don't always lead to trend reversals, and more likely the highs and lows of the divergence bar will define a price range. A weekly close above the highs of the positive divergence bar will lead to higher prices (and is considered a breakout) and a weekly close below the lows of the positive divergence bar will lead to lower prices (and is considered a breakdown). The highs of the current positive divergence bar are at 90.13.

My interpretation of the SPY chart is as follows: the price action has been good with four consecutive weekly closes over 86.78. Currently, prices are trading to resistance levels as defined by the highs of the positive divergence bar. A weekly close below 81.78 would be serious technical damage. A weekly close below 86.78 implies weakness and increasing caution. A weekly close over the highs of the positive divergence bar at 90.13 would be bullish. As you can see, prices have probed this area but failed on a closing basis.

Figure 2 is a weekly chart of the Dow Jones Industrial ETF proxy, the Diamond Trusts (symbol: DIA). The key levels and positive divergence bars are noted. Prices have yet to close above near term resistance at 88.36. A weekly close below 82.64 would be disastrous.

Figure 2. DIA/ weekly

Figure 3 is a weekly chart of the Power Shares QQQQ Trust (symbol: QQQQ). As mentioned above, the support zone between 29.72 and 29.36 failed. This is a sign of weakness and this level is now resistance. A weekly close below 27.63 is very bearish.

Figure 3. QQQQ/ weekly

Figure 4 is a weekly chart of the i-Shares Russell 2000 Index (symbol: IWM). As mentioned above, last week's support is now this week's resistance - just barely. Even though it was by a few pennies, a weekly close below this (47.58) level is poor price action. I would be cautious on IWM until further notice. Support levels are over 10% away at 42.48.

Figure 4. IWM/ weekly

The mixed price action along with the sentiment picture suggests caution. What is the impetus for higher prices? Until resistance levels are taken out in all the major indices, I will not be convinced that the recent rally (from mid November) is nothing more than a bear market rally.