 The ETF Authority for Monday, April 21st, 2003 Volume 2, Issue #16 Published weekly on Sunday evening, The ETF Authority is a short-term swing trading newsletter that can help you profit from some of the most heavily-traded securities on the market -- exchange-traded funds (ETFs). *Please
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MARKET SUMMARY Thursday's action was quite exceptional. Even though the weekly initial unemployment claims report showed a huge increase and the Philadelphia Fed manufacturing index tumbled more than expected, stocks jumped on relatively good volume (especially in light of the fact that Thursday was both a Jewish holiday and a get-away day for many for a holiday weekend). Market breadth was excellent as well, with three stocks gaining for each loser on the NYSE. Volume breadth was more than 5:1 in favor of winners over losers. ECONOMIC ANALYSIS Other data were of secondary importance, though the rise in weekly jobless claims and volatile Philadelphia Fed survey (-13.0 in April versus -8.0 in March) did receive some press. However, they certainly did not cause any harm to the stock market's bull camp! The main event this week will be the first estimate of Q1 Gross Domestic Product (GDP). The data are due out on Friday at 8:30 AM (EST). Consensus calls for +2.0%. The deflator is expected to come in at +2.0% as well. Risk is for a higher deflator, which of course will partially negate any gains in GDP. The balance of trade data though are a bit better than many had forecast, which will dampen the negatives from the war. However, on balance, the risk is for the final result to be closer to +1.5% than +2.0%. If the data show up stronger than that, it will likely be due to defense-related activity. Other data this coming week will be of secondary importance. The Fed's beige book is out on Wednesday and should remain guarded. Durable goods orders, due on Thursday, are expected to sink -1.0% after falling -1.6% in February. A weaker-than-expected result would likely lead to revisions lower in GDP forecasts. However, given some of the good numbers coming out of the tech sector, plus the risk that the war effort may help recent orders data, I suspect that we could see a better-than-expected number. University of Michigan Consumer Sentiment and new and existing home sales are also due out on Friday. WHERE DO WE GO FROM HERE? This leaves me with a moderately bullish bias for the start of the week. However, I cannot recommend purchases except on pullbacks or via confirmed breakouts. And since there is a possible interpretation that says the rally is complete, I would only buy with tightly trailed stops. I see substantial resistance and possible targets in the S&P 500 Index (SPX, 893.58) in the 913-917 range. A break above there would permit a further rally towards a resistance line near 940. Maximum upside potential is towards 965 -- the high from August 2002. Remember that the markets are pain maximizers. They will tend to move in such a way as to cause financial harm to the most people possible. There remain a lot of skeptics out there (yours truly included). Most bears will fold on a move past the resistance line or the August '02 peak. Many of my brethren in the technical analysis community will say we've confirmed a double or triple bottom upon a close past 965. That would be the perfect place to turn down. But until prices actually start to fall, there is little to do from the short side. An increase in volume on the downside, however, is not required. Just follow-through to lower prices with clear five-wave price action.
Below you'll find a table of weekly performance data for all ETFs that I track for this newsletter...
3. ETF RELATIVE STRENGTH MONITOR We saw plenty of movement last week in the relative strength world. Debt futures all slipped in relative strength, even though most managed small price gains. If stocks can manage to stay in positive territory this week, then I see potential for the debt-linked ETFs to take a firm hold at the bottom of our rankings. That should provide us with a very compelling set of relative strength oriented trades in the next week or two. The Energy SPDR (XLE, $22.30) continued to ease in terms of our index. Although the ETF did rise almost +0.9%, that was well below the broad market's performance. With the next leg down in stocks likely to occur due to increasing signs of a weak economy, I doubt the energy sector will prove to be a defensive play any longer. That should keep pressure on XLE. Tech-oriented issues surged last week, with the Nasdaq-100 Trust (QQQ, $26.82) jumping +5.1%. Eight ETFs managed gains of +3.5% or higher! The Financial SPDR (XLF, $22.84) jumped +4.1% and has now regained almost all of its 2003 losses. Don't expect that to continue. One other likely upcoming relative strength play will be to purchase the Pharmaceutical HOLDRs (PPH, $73.91) while shorting tech shares or the broad market. PPH currently ranks dead last in our relative strength index and has tumbled -1.04% over the past thirteen weeks. Only four other ETFs I track for this newsletter have performed worse over that time period. With stocks likely ready to turn lower, this defensive sector should outperform the broad market, even if its overall value drops. Here is this week's ETF Relative Strength Monitor...
RELATIVE STRENGTH ETF TRADING IDEA: BUY S&P 500 SPDRs (SPY, $89.56) WHILE SELLING
SEMICONDUCTOR HOLDRs (SMH, $26.43) Remember, there is even a chance that the stock market has topped now, so the trade might immediately start working for you. If it doesn't, the ratio of the price of SPY to SMH is unlikely to fall much below 3.30 (it is currently at 3.39). Note that SMH reached its highest level of the year, but did not have any follow through. It also peaked on divergent momentum.
Put on this trade because:
Please note that tracking stops and targets for this trade may not be all that easy if you use the price ratios I am using in the chart. There is almost no way to automate the trade because of this, so you will need to check prices periodically and do the calculation yourself (unless you have advanced front-end charting or trading software). I recommend that you either check about every 30 minutes, or for those who cannot do that, check at the end of the day to see if entry requirements are met.
******************************************** When ratio of the price of SPY/SMH reaches 3.33 or lower TARGET: Ratio of 3.55 It is impossible to compute
exact profit and loss levels since the exact purchase levels, and not the
ratios, will affect your actual returns. However, the expected gain will be
around $320, while the stop would result in a loss of about $80.
Short-term RSI continues to hold slightly above 50, which also favors at least minor continued gains. Downside momentum, as measured by DI-, is fairly flat, though I do have some slight concern that upside momentum (DI+) is weakening a bit. That is why I want to buy on a dip and aggressively trail stops higher. Note that last Wednesday saw a bearish engulfing line, which is a negative, but there was no follow-through lower and it came amidst a trading range. The dicey long-term situation though calls for aggressively trailing stops higher.
My decision to buy DIA is based on the following factors:
******************************************** CANCEL THIS TRADE on a price move above $83.65 before entry, if the trade is not executed by the end of the day Monday, or if DIA opens below $82.56. TARGET: $86.80 Assuming a purchase at $82.90
and sale at $86.80, you will post a gain of $195 on this trade, or +4.7%. BUY JAPAN WEBS (EWJ, $6.37) AFTER FURTHER LOSSES
Buy EWJ below the market due to these factors:
******************************************** CANCEL recommendation if EWJ trades above $6.40 TARGET: $6.80 Assuming you buy at $6.10 and sell
at $6.80, your profit will be $350, or +11.5%.
5. CONTINUED GUIDANCE ON PREVIOUS TRADES SOLD SHORT ENERGY SPDRs (XLE,
$22.30) Maintain shorts here. The stock market is gearing up for further losses, and though last Friday's gains were impressive, they came on low volume. The weekly trend remains clearly negative, with RSI stuck below 50. As long as the triangle resists, the bias has to remain bearish.
------------------------------- SELL S&P 100 (OEX) OPTIONS
STRANGLE **************************** Sold two OEX 490 Calls (OXBDR, $0.05) for $0.90
each TARGET: Closed on Monday, April 14, 2003 at
the open for $0.15. Final profit was $250.00 per our
recommended two-lot position. Thanks again for reading this week's issue, and good trading in the week ahead!
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