The ETF-Letter Blog

The COMPQ has convincingly broken above the wedge we’ve been watching, with a followthrough day. This breaks the “grudging” resistance we’ve been talking about. We’ll guess that this pattern will act more like a triangle, than a wedge. Expect new resistance at 2324, based on a high back in September 08.  Get a free copy of the ETF-Letter at www.etfdiscipline.com, for why we’ve been watching this pattern.

$COMPQ has broken above the wedge we’ve been talking about for weeks, pushed by housing news. This could be the break into new highs for next year. be gearing for the upside breakout on good news.Our shorts, GLD, EWZ and FXI, are gapped lower today. Most action seems to be after hours on these stocks.

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Thursday’s market dropped the Nasdaq composite, SPY, and the Russell 2000 (IWM) below the trendline of the rising wedge we have been following. (The wedge in the IWM is less pronounced.) A rising wedge is a bearish pattern that works in commodities and individual stocks. In the case of broad averages, I’m not sure that the targets are as extreme as for individual entities. Therefore, if the pattern “succeeds” it will deliver a 3% rollback to 2114 on the Nasdaq. In any case, I have set stops tight in the event of a sell-off tomorrow. I suggest that if you hold something and it gaps down, wait 5 to 15 minutes to see if there is a gap fill before selling.

There is no scheduled news tomorrow, and it seems as if market sentiment remains bearish in the face of news that was moderately good on Thursday. Of course, there is no guarantee what will happen tomorrow, but it helps to be ready.

We’ve been discussing the pattern in the ETF-Letter for several weeks. For a free copy, go to www.etfdiscipline.com

Paul Accampo

Editor, ETF Letter

The tightening of the COMPQ wedge continues. We are coming out of the Bollinger squeeze on some good news on Wednesday and the direction is up. The dollar is down, but hasn’t broken its 5-day trend, which is moving higher at 60%/year. We’re going to keep an alert below the green line and be ready to hedge the portfolio if it triggers. Meanwhile, we’re long!

See Chart Below.

The rising wedge in the COMPQ continues, with Monday’s close at the top of the range. The market felt bullish, with only 7 of the 80 funds we track losing on the day.

The dollar, the internet, Japan, and the airlines fell. The question is whether three will be enough momentum to push over 2220, or another fall back. The Bollinger squeeze (blue arrows) and the narrowing of the wedge suggests a big move. I think that if we don’t push higher, we’ll get a break back to 2140, or worst case, to 2120.

Much depends on how the market responds to spending, manujfacturing, trade balances, and inflation–all data that will break before tomorrow’s market opening.

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The dominant pattern this week is a bearish rising wedge. As the chart shows, prices are tightening up, forming a Bollinger squeeze. Technically this pattern breaks out to the downside with a possible 8% drop from Friday’s close, on falling volume. We are not saying this will happen, but we want to be prepared with specific stops if it does.

The wedge could also break to the upside; however, it has to get through stubborn resistance at 2214 to fail in this way. As noted below, many other patterns are in triangles that have no up or down bias.

There is new leadership in industrials, healthcare, utilities, aerospace, and consumer discretionary funds. Financials and foreign funds have lost strength. The market will move sideways to slightly up as we move into the holidays. In January, earnings will dominate.

For further explanation, details and charts, get your free copy of The ETF Letter at our website, www.etfdiscipline.com

We’re watching the nasdaq, but we see the same thing in the SPY, and we have two concerns: First, the Bollinger bands are pinching down, pointing to a large breakout in either direction. Second, we have a rising wedge formation. This is a bearish pattern that indicates selling by institutions to individuals. Bad news could, in theory, cause a break below the green line at 2160 that could (theoretically ) take the market down to 2024, a 9% drop. The wedge will fail if the nasdaq goes above the red resistance line. What’s missing from the wedge is falling volume, a necessary requirement for the wedge to work. We’ll be watching for falling volume on Friday.

 The more reliable pattern is the Bollinger pinch. You can see on the chart a pinch around October 8 that led to a rally to 2191. Either pattern could fail; however, knowing what is possible tells you to set your stop just below 2160, as opposed to 2114 or 2024.

The COMPQ ascending wedge just wound tighter! A breakout is likely soon.

The Nasdaq has backed away from resistance at 2214 and is showing little sign of direction. The chart shows a ascending wedge, which is a bearish formation. As volume falls off, we could get a sharp break lower on high volume. The immediate cause of the drop on Tuesday was a mini-Dubai scare as Dubai banks reported losses. Bad news from Greek banks pummeled international and emerging markets. 

The only ETF’s moving up today are UNG, FXY, UUP, ITF, TLT, PFF, IHF, and JRS.  Real estate is weathering this pullback well and could be a buy candidate on a rebound. GLD is off 2.2% on the day at this time. Watch your stops.

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The Nasdaq composite gapped higher on Thursday, before retreating on a moderately negative ISM services report. We are almost back to the November 16 high of 2205.32. This level is near a pause in last years crash that took place between September 9 and 15, 2008. There is possibly some stock supply that is now contributing to current resistance. The lukewarm reaction to ISM suggests moderately bearish sentiment. But there is progress. The Nasdaq has hit successive peaks at 2168, 2189, and 2205. We will guess that this bounce could take us moderately higher, maybe to 2240, but it needs help from the news. Failing that, we would guess a roll off back to 2113.   

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