Major Index ETFs Breakout

Wednesday, January 18th, proved to be a pivotal day as ETFs that track major U.S. stock market indexes broke through significant resistance levels that now become support as markets try to push higher for a positive January close.

On My Wall Street Radar



In the chart of the S&P 500 Index above we see many interesting factors that are duplicated in major ETFs that track the S&P 500 like S&P 500 SPDR (NYSEARCA:SPY) and iShares S&P 500 Index (NYSEARCA:IVV)

The S&P 500 point and figure chart indicates a “triple top breakout” on January 3rd at the 1260 level, and we can see how it pushed through further resistance at 1290 this week.  The index is on a “buy” signal and has an upside price objective of 1520, some 15% above current levels.  Next significant resistance is at 1340 and 1370, some 2%-4% above current levels.

The configuration of the other major U.S. stock market indexes is similar to that of the S&P 500 (NYSEARCA:SPY)

The Russell 2000 as represented by iShares Russell 2000 (NYSEARCA:IWM) has broken through the barrier at 765 to form a triple top breakout and the Nasdaq 100, PowerShares QQQ Trust (NYSEARCA:QQQ) eclipsed its resistance at 2400, as well.

Finally, the Dow Jones Industrial Average, SPDR Dow Jones Industrial Trust (NYSEARCA:DIA) gapped through and held the 12,500 level.

So all major indexes are in bullish configuration with positive momentum, and the S&P 500 (NYSEARCA:SPY has gained approximately 8.5% since December 15th.  Short and medium term momentum for stocks and ETFs are positive, however, all are overbought in the immediate term with RSI readings approaching 70.

The Economic View From 35,000 Feet

The recent rally has been largely powered by a continuing stream of positive economic and earnings reports from the United States.

Last week positive news came from the Empire State Index, Industrial Production, Capacity Utilization, Home Builders Index, Unemployment, Philadelphia Fed and Existing Home Sales.  Negative numbers were reported in Housing Starts and with some earnings misses, most notably Google in the important tech sector (NYSEARCA:QQQ)

Earnings growth is slowing, but still positive, and earnings will be in focus this week as we enter the heart of the earnings season and will hear from important names like Apple, Yahoo, Ford, ATT and Boeing and these number will help determine if the indexes can add to their three straight weeks of gains.

Next week will also bring important economic reports with the Richmond Fed, December Pending Home Sales, durable goods, Leading Indicators and the Chicago Fed Index.

Big news makers next week will be the FOMC announcement and Bernanke press conference on Wednesday in which they will project the future of interest rates, and on Friday comes the Fourth Quarter GDP report.

Of course, not to be forgotten is Europe, where the Greek debt talks lurch along and the European Finance Ministers meet on Monday to determine the fate of the next phase of the Greek bailout and set the framework for the European summit on January 30th.  Other political action comes in President Obama’s State of the Union address on Tuesday, January 24th.

Bottom Line for ETF and Stock Market Investors

The U.S. stock market is in the midst of a powerful seasonal rally that has broken to new levels approaching two year highs last seen in May, 2011.  Technical indicators, while positive, would point to a short term pullback from overbought levels.  Fundamentals at home are strong but there is still plenty to worry about with Europe and the possibility of a “disorderly default” in Greece or Portugal, particularly the Greece talks this week which are again in the 11th hour.  Today’s situation will likely be the tenor of the year; an upward push for ETF and stock market performance, always tempered and potentially threatened by default in Europe.  In my opinion, it is not a “buy and hold environment,” but there will be opportunities for the nimble.

Disclaimer:  Wall Street Sector Selector actively trades a wide range of exchange traded funds (ETFs) and positions can change at any time.