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Powerful Pivots Identify ETF Highs


The market's sharp decline on Thursday likely confirms that the stock market is in the top-building process.

The earnings from Cisco Systems (NASDAQ:CSCO) and Wal-Mart (NYSE:WMT), combined with higher rates spurred by better unemployment numbers, caused the heaviest stock market selling in quite some time. All the major sectors closed lower with seven losing more than 1%.

The decline was consistent with the deterioration in the technical studies that has been evident over the past few weeks. There was a divergence between the number of stocks making new highs and new lows, and the new lows spiked to 375 on Thursday.

The McClellan Oscillator has dropped to -228, which is a moderately oversold level. This does increase the odds of a rebound in the next week or so.

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In my outlook for August, I continued to recommend taking profits as the market was moving higher; using the quarterly pivot point analysis in combination with starc bands can be a good way to identify profit-taking levels. In early July, I provided a table of third-quarter pivot levels to save for future reference.

I have now also added the third-quarter highs for each of the ETFs, and only the Select Sector SPDR Utilities (NYSEARCA:XLU) has not reached its quarterly R1 resistance. Four of the ETFs have come within 1-2% of their R2 resistance levels before they reversed this week.

During the current market correction, it will be important to keep an eye on the quarterly pivot levels, which is at $161.01 for the Spyder Trust (NYSEARCA:SPY). They should provide an important level of support. Three of the four ETFS featured below were up over 8% at their quarterly highs.

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Chart Analysis: The Select Sector Consumer Discretionary ETF (NYSEARCA:XLY) exceeded the quarterly R1 resistance at $59.01 in early July.
  • XLY's high at $60.75 was just 1% below the quarterly R2 resistance at $61.62.
  • The down gap opening Thursday completes a short-term top with next support in the $57-$57.50 area.
  • The quarterly pivot is at $55.46 along with the daily uptrend, line a.
  • The relative performance did form a short-term divergence, line b, at the recent highs.
  • The RS line is holding well above the uptrend, line c.
  • The on-balance volume (OBV) also formed a negative divergence at the recent highs, line d, and has dropped well below its WMA, as well as the prior lows.
  • Initial resistance is now at $59.48 and the 20-day EMA.

The Select Sector SPDR Health Care ETF (NYSEARCA:XLV) was one of my favorite sectors for 2013, and it hit a high of $51.50 on August 1, which was just 2% below the quarterly R2 at $52.52.
  • The close Wednesday was the lowest since July 16, so those who bought in the past four weeks are now showing a loss.
  • There is next support in the $49 area with the quarterly pivot now at $47.95.
  • There is trend line support just below $47 (line e).
  • The 38.2% Fibonacci retracement support from the November 2012 lows is at $46.48.
  • The relative performance peaked in April and did not make a new high, line f, with prices.
  • The RS line has strong support now at line g.
  • The daily OBV did make a new high with prices but has just dropped below its WMA.
  • The OBV has more important support at the uptrend, line h.
  • There is initial resistance now in the $50.50-$50.80 area.

Click to enlarge

The iShares Russell 2000 Index (NYSEARCA:IWM) made a high of $105.63 on August 5, which was a gain of 8.9% for the quarter.
  • The gap below support $103-$103.33 now creates a strong level of resistance.
  • IWM is now just above the quarterly R1 resistance at $101.88, which was surpassed on July 11.
  • The recent high was just 1% below the quarterly R2 resistance at $106.75.
  • The daily uptrend, line a, is now at $97.60 with the quarterly pivot at $95.50.
  • The 38.2% Fibonacci retracement support is now at $94.36.
  • The daily OBV did confirm the recent highs but has now dropped below its WMA but does not yet show a completed top formation.
  • The weekly OBV (not shown) is still above its WMA
ProShares QQQ Trust (NYSEARCA:QQQ) closed well below its 20-day EMA Thursday after it made a new rally high at $77.27 on Tuesday.
  • QQQ opened the quarter above the pivot at $71.03, which was a bullish sign.
  • The move above the R1 resistance at $75.19 set the next target at $79.10, the quarterly RS level.
  • The next support is in the $73.70 to $74.40 area.
  • The 38.2% retracement support from the November lows is at $71.14.
  • This is very close to the quarterly pivot ($71.03) and daily uptrend, line d.
  • The relative performance is still above its WMA but is below the July highs.
  • The OBV may have formed a short-term top but there were no strong divergences at the highs.
What It Means: Thursday's sharp decline likely confirms that the stock market is in the top-building process. Given the weakness in the market internals, a rebound is likely by early next week.

Unless the A/D ratios are very strong on the rally, it should set up a good buying opportunity in the inverse ETFs for either a trade or to hedge your existing equity positions.

Editor's Note: This article was written by Tom Aspray of MoneyShow.

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