Monday, January 5, 2009

Key Price Levels: January 5, 2009

As stated in this week's commentary on market sentiment:

"The most bullish thing about the price action has been the price action. All the secondary indicators such as sentiment, volume or market internals have not mattered.... The Russell 2000 and NASDAQ Composite have broken through resistance levels (albeit on sub par volume), and the S&P500 and Dow Jones Industrials have held at support and moved higher. This is all good - not only are prices headed higher but we know where are our points of failure (i.e., breaks of support)."

In the week ending on December 26, 2008, I expressed concern that the QQQQ (NASDAQ 100 proxy) and IWM (Russell 2000 proxy) had closed below support (old resistance) levels. The week prior the QQQQ and IWM barely and unconvincingly closed above resistance levels. This past week prices are now back above resistance levels, and all this has done is create a lot of whipsaws (i.e., in and out trading) in the QQQQ and IWM. This is not the norm and never fun.

The SPY (S&P500 proxy) and DIA (Dow Industrial proxy) have been above key levels for several weeks now, and this past week, these ETFs have closed above the next level. In the SPY and DIA, there have not been any hiccups (i.e., whipsaws).

To review the methodology and the significance of the key price levels please click on this link.

My interpretation of the SPY chart (see figure 1) is as follows: the price action has been good with five consecutive weekly closes over 86.78. Prices traded through resistance levels (90.13) as defined by the highs of the positive divergence bar. This (90.13) level becomes support; a weekly close below 90.13 would be technical damage and imply weakness and increasing caution. A weekly close over the pivot high at 92.89 is very bullish suggesting that prices could make it to $100.

Figure 1. SPY/ weekly

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. This past week, prices closed above near term resistance at 88.36; this now becomes support, and a weekly close below this level suggests weakness. A weekly close above 93.28 would likely propel prices to 103 and close the gap from October, 2008.

Figure 2. DIA/ weekly
Figure 3 is a weekly chart of the Power Shares QQQQ Trust (symbol: QQQQ). The past week prices closed above the support zone between 29.72 and 29.36. This is bullish and this zone now becomes support. A weekly close above 31.06 would likely see prices fill the October, 2008 gap at $36.

Figure 3. QQQQ/ weekly

Figure 4 is a weekly chart of the i-Shares Russell 2000 Index (symbol: IWM). Prices closed at the resistance level pivot of 50.50. Support is the old resistance zone of 47.58 to 48.26.

Figure 4. IWM/ weekly

There is no doubt the price action has been positive, and as stated above, all the secondary factors, like volume, the news flow, economy, and sentiment to name a few metrics, are substandard. I am not one to chase prices higher especially in a bear market that is short term over bought. Figure 5 is a daily chart of the SPY showing the short term oscillator constructed from various breadth and sentiment metrics. This is an over bought market. At the very least, I would expect sideways action before prices moved higher.

Figure 5. SPY/ daily

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