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ETFs Present Solid Investment Opportunities
“Sector Watch”: As Indexes Try To Test February Highs, These Two ETFs Present Solid Investment Opportunities
by Jim Stanton, Technical & Quantitative Analyst, Smart Profits Report
Since my last “Sector Watch” column on March 24, the major stock market indexes - Dow Industrials, Nasdaq Composite and S&P 500 - have all rallied and are currently in the process of testing their February highs.
So far, though, only the Nasdaq 100 has actually surpassed its February high. Does this bode well for the market? Some think so. But the truth is: Unless the other indexes follow suit, the market action over the past two months could just be a consolidation pattern (trading range) that will send the indexes lower once it’s complete.
For example, the Dow Industrial Average soared close to 400 points on March 18 and April 1 (last Tuesday). On April 1, both the volume and breadth (the number of advancing and declining stocks) was less impressive than on March 18.
Tellingly, after the market’s big rally last Tuesday, the volume and breadth then declined over the latter part of last week. This means that if the bulls want to get their way, these numbers have to improve on any further rallies, otherwise it becomes increasingly likely that a selloff will resume.
Needless to say, that puts the indexes at a critical decision point and the upcoming market action will hopefully clear up the fog a little bit.
Beware The Short-Covering Bear Rallies
One key element of bear market rallies is that they often feature violent short-covering spells, where those investors who are short on stocks quickly “cover” their short positions at the hint of a rally, thus leading stocks even higher.
Much of the buying we’ve seen since the January lows has featured this kind of short-covering action. On March 18, for example - the day that the Dow Industrials posted its largest gain in five years - the best-performing stocks were the top 50 short-interest stocks in the S&P 500.
That said, the short-interest ratio is at its highest level in over 40 years, which could be the fuel that sends the markets higher.
All Eyes On The February Highs
The most important thing to watch over the near-term are the February highs. The bottom line is this…
The bulls need the Dow, S&P 500, and Nasdaq Composite to close above their February highs on good volume and market breadth.
However, if these indexes rally up to either side of the February highs on unimpressive volume and market breadth, a reversal back down becomes more likely.
In line with the market’s recent mini-rally, many ETF’s are also at, or close to, important resistance levels. I’ve picked out two below that boast the most interesting charts.
The Bullish And Bearish Scenario For The “China 25″
The daily chart below shows the iShares FTSE/Xinhua China 25 Index (NYSE: FXI), which represents 25 of the largest and most liquid Chinese stocks.
As you can see, the stock plunged almost 50% since October 2007 before bottoming out in late March. But it has rallied since then and reached the top of its trading channel around $150 last Friday. However, it was unable to close above it. Here’s the bullish and bearish outlook…
Bullish Scenario: A weekly close above $150.
Bearish Scenario: If it fails to close above $150 and instead retreats back below $131, it will probably test the lows around $120.
A Networking Revival
The other ETF that is worth a look this week is the iShares S&P GSTI Networking (NYSE: IGN), which represents a basket of multi-media networking stocks.
As the chart below suggests, networking stocks have been one of the worst-performing sectors since the beginning of the year. However, since bottoming out on March 17, you can see that the group has risen along with the rest of the stock indexes.
This daily chart has a more bearish look to it than many of the other ETF’s, and is also further away from its February highs than the indexes.
In fact, the stock appears to be tracing out a bearish consolidation pattern (trading range), with the $30 area being the top of the trading range. But note the 90-day moving average (the red line). In this case, it’s a very useful indicator, as it sits at the top of the trading range, just above $30.
The stock has short-term resistance around $29.05, then major resistance in the $30-$31 area. If the stock indexes test either side of their February highs, and then begin selling off, IGN could offer a good short opportunity.
That’s all for this edition. I’ll have more for you in a couple of weeks.
Jim
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