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VIDEOHow Healthy Is the Market? Check These ETF Charts
By
Quint Tatro
Aug 11, 2010 11:00 am
The transports, semiconductors, and financials are key components of the domestic economic engine, and traders should watch for them to be firing on all cylinders.
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Anyone who has been listening to me for longer than a cup of coffee will know that I have several “keys” that I watch for overall market health. For example, I watch for IBM (IBM) to be trading over key levels. Likewise, I want to see some leadership out of semiconductors and financials. With that being said, let’s jump right in and look at some ETF charts that, in my opinion, give us a barometer on the market’s health.
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Gold. Just say the word and it brings a smile to the face of many traders. Very few investments have come close to matching the run in the gold ETF GLD over the past few years. Even with the bubble of 2008 GLD wasn't creamed as much as the major indexes. And once GLD bounced over the psychologically significant $100 mark in late 2009, there's been no looking back.
So what's the current outlook for GLD, and how do we play it here forward? Let’s take a few cues from the chart. Clearly, the $100 level would be the final line in the sand. But that's a full 15% lower from here, and more risk than I'm inclined to put on any one trade. A closer area to put a stop would be the weekly 50-period moving average, which currently stands around $110.00. This brings our risk per share into a manageable range. I'd also wait for a weekly close below this area and not just a mere kiss of the MA. As long as GLD continues to track higher, it's a buy in my book.
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Now compare the chart of financials (XLF) to that of GLD. Over the same time period of five years, there's a stark contrast in the two. The fundamentalists out there know that typically GLD doesn't trade in tandem with the broad market, and the financials are one major piece of that equation. Look at just the time period from 2009 forward, and an interesting dichotomy appears. GLD has continued to ramp higher and while lagging a bit, the fins also pushed higher before going flat the last 12 months. In the minds of many fundamental investors, these two arenas cannot move in tandem for long.
XLF is struggling mightily to regain the weekly 50-period moving average, and in my opinion, is a huge indicator of overall market health. Leadership must come out of this sector for the bulls to have any legs. The sideways base can be perceived as a pause before another leg down starts, or as a launching pad for a monster bull run. I tend to believe it will be the latter, but I'm also cognizant of what the chart is telling me at this moment. Underneath, XLF is whispering that it has no momentum and is failing to make new highs. Wise traders should heed these subtle clues.
I can hear it now: “But Qman, you just said you think XLF is going higher from here, and then you turn around and say the whispers are for lower prices. What gives?” Au contraire mon frère. An astute technical analyst will always weigh both the risks and rewards of owning any position before he or she places a single dollar on the line. It's my goal to give traders the tools to make informed decisions about their trades.
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The other major leadership sector is the semiconductors. With the technological revolution over the past 25-30 years, semis are always at the forefront of any major market advances. In my opinion, semis must once again assert leadership for the bulls to regain confidence. SMH is the best read on the sector and is currently at the lower end of a multi-year channel. That being said, SMH is down only about a dollar on the year and is holding the 50-week.
In order for me to be convinced that the bulls are ready to run higher, I'll insist that SMH start to perk up. The first steps are for SMH to take out $28.00 in the short term and not violate the lower channel. Once SMH approaches the upper channel, which coincides with 2010 highs, I'll have a bit more faith in the long side opportunities that have been showing up in the charts.
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The last stalwart is, of course, the transports via IYT. A market indicator of epic proportions, the transports have been followed as a key component for over 100 years. As the companies who move the goods America produces and consumes, the transports are considered an indication of the overall economic engine running our country. A key inflection point for IYT is approaching with the $82.00 level. This was major support back in mid-2008 before the sell-off hammered all names. Currently IYT is trading between the 50-period MA and this resistance overhead, so a break in either direction should be used by traders as a clue on general market sentiment.
While I take my buys and sells from the individual equities as they set up in tight formations, I'd be remiss to ignore some of the bigger-picture market sentiment. My money management firm isn't a big enough player to move the markets, so it's my goal to follow the money and take a slice out of the middle of any moves. The transports, semis, and fins are key components of the domestic economic engine, and traders should watch for them to be firing on all cylinders. Gold is in a world of its own the past few years, and as people keep flocking to its perceived safety, it provides a glimpse of the retail investor’s mindset. Your market read will improve as you keep these star ETFs in mind.
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No positions in stocks mentioned.
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