Why actively trade ETFs?

Have you looked at any weekly or monthly charts of the major broad-based ETFs lately? While the daily charts provide you with a relatively short-term view of what is happening in the markets, the weekly and monthly charts provide you with a "big picture" that helps you keep things in perspective. For example, let's take a look at DIA (Dow Jones Industrial Average). On the daily chart, DIA is above all of the primary moving average levels we actively follow (20, 50 and 200-day). This, by itself, would indicate an overall upward bias to the index. However, if you take a look at the longer-term weekly chart, you will notice that DIA has just run into its 200-WEEK moving average, which is exactly the level at which it began showing weakness yesterday. Here is that level illustrated on a weekly chart:

DIAweek031017.jpg


Since the 200-period moving average is the most powerful moving average in terms of its ability to provide support or resistance, the fact that DIA is pressing against its 200-WEEK moving average is definitely noteworthy. The longer of a time frame you are analyzing, the more powerful the support and resistance levels. Therefore, a 200-week moving average is much more powerful than a 200-day moving average. So, if longer time frames are more important, we may as well take a look at a MONTHLY chart of DIA, in which each bar represents an entire month worth of data:

DIAmonth031017.jpg


As you can see, DIA has also run into resistance of its 50-MONTH moving average, which is converging with the 200-WEEK moving average. When you have convergence like this, it is more powerful than if only one moving average was meeting the price, especially when you are looking at such a long time frame as weekly and monthly charts. Does this mean that the rally in the Dow is over? It's difficult to say with any certainty because the market has certainly been resilient lately. Nevertheless, only a foolish trader or investor would ignore the potential warning of such a powerful moving average convergence. Because the time frame of weekly and monthly charts is so long, it may take weeks or months before the Dow actually pulls back away from these moving averages (or maybe not), but just be ready when it eventually does.
 
One would expect at least that we have some consolidation here based on the charts you presented. We must remember that those who would be sellers just below the averages, will be buyers just above.
 
Quote from inandlong:

One would expect at least that we have some consolidation here based on the charts you presented. We must remember that those who would be sellers just below the averages, will be buyers just above.
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Quite possible. I meant to offer no opinion on this, but rather to just point out the convergence, which I found interesting because it was on two longer time frame charts. Just presenting the facts.
 
Right, I look at the longer time frames too, and have noticed the same. If we climb above these major averages, there is only previous S/R to technically guide us. Overbought and oversold indicators, as we saw from 1998-2000 can be very little help.

Thanks for the charts.
 
Just wanted to let you know we have entered a long position in PPH, which is the ETF for the Pharmaceuticals. We bought today at 74.00 and have a stop at 73.45. Our target is around the 76.90 area, just below the high of October 3.

We have been stalking PPH for an entry during the past several days and bought it today after it formed a bullish hammer candlestick into the close. Notice that PPH formed a "higher low" at $74, after its last major bounce ended in mid-September. Then, after a minor bounce in the beginning of October, PPH came back down a few days ago and has been forming a base of support and double bottom at the $74 support level. PPH showed relative strength to the broad market last Friday as well. Relative to the broad market, the sector has been quite weak during the past five months. However, due to sector rotation, we feel that institutional money flow will begin rotating out of some of the overheated tech stocks and back into the "safer" pharmaceutical stocks. As PPH encounters its 20 and 50-day moving averages, we will watch it carefully and will tighten the stop if necessary. Remember that you can follow the price and fair value of PPH by watching its index, which is $IPH.X. Make sure to use limit orders when trading PPH.

By the way, if you have not studied the underlying components of the various sector HOLDRS recently (such as SMH and PPH), you may wish to visit www.holdrs.com to view the list of stocks that comprise each sector ETF, as well as their percentage weightings. Doing so enables you to more accurately predict the price movement of the ETF by following the price action of the leading stocks that comprise it.
 
We have raised our PPH stop up to 73.90, ten cents below yesterday's entry price.

Drug stocks showing relative strength, which should push PPH along. PFE breaking a downtrend that has been in place since June, and JNJ poised to do the same. Just need PPH to break through its 20 and 50-day MAs now.
 
Quote from deronwagner:


As you can see, DIA has also run into resistance of its 50-MONTH moving average, which is converging with the 200-WEEK moving average. When you have convergence like this, it is more powerful than if only one moving average was meeting the price, especially when you are looking at such a long time frame as weekly and monthly charts. Does this mean that the rally in the Dow is over? It's difficult to say with any certainty because the market has certainly been resilient lately. Nevertheless, only a foolish trader or investor would ignore the potential warning of such a powerful moving average convergence. Because the time frame of weekly and monthly charts is so long, it may take weeks or months before the Dow actually pulls back away from these moving averages (or maybe not), but just be ready when it eventually does. [/B]
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Deron you a common sense guy when it comes to trading and that is a rarity out there. This is the method that often works best. One thing I would like to make known to you is that you discuss convergence of the 200 week ma on the DIA with the 50 month MA on the DIA as yet another reason to be cautious against further upside. I agree with the less than stellar future upside performance here as well, however, one thing you should know in the future so that you don't repost it. That is that the 50 MONTH MA will always "converge" with the 200 WEEK MA on every single chart in the universe because they are one in the same! The monthly chart is 4 times higher in terms of data packed in per bar than the weekly go look at any chart you will see this is 100% correct. (50ma on monthly always = 200ma on weekly) I thought I should point this out to you as you seemed not to understand this as you used this coincidental "convergence" as part of your reason to justify these graphs of the DIA. Thanks and good trading.
 
Quote from jay123:




Deron you a common sense guy when it comes to trading and that is a rarity out there. This is the method that often works best. One thing I would like to make known to you is that you discuss convergence of the 200 week ma on the DIA with the 50 month MA on the DIA as yet another reason to be cautious against further upside. I agree with the less than stellar future upside performance here as well, however, one thing you should know in the future so that you don't repost it. That is that the 50 MONTH MA will always "converge" with the 200 WEEK MA on every single chart in the universe because they are one in the same! The monthly chart is 4 times higher in terms of data packed in per bar than the weekly go look at any chart you will see this is 100% correct. (50ma on monthly always = 200ma on weekly) I thought I should point this out to you as you seemed not to understand this as you used this coincidental "convergence" as part of your reason to justify these graphs of the DIA. Thanks and good trading.
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Ha! You're absolutely correct and I apologize for the mistake. It's simple math, but I never thought about it, nor have I noticed it on any other charts because it is rare that I find an index that lines up with the 50-month/200-week MA.

Thanks for the compliment and feel free to correct me in the future as well.
 
Well, the PPH trade we entered for swing long was stopped out today for a 72 cent loss due to sharp opening gap down below support. We had an unrealized gain of more than one point yesterday, but we were using a looser stop since we were focused on a 3 - 4 point gain. Sometimes we will be stopped out when something gaps against us, but we also cannot make the multi-point gains without taking the overnight risk. That's trading for you!

Fortunately, we shorted DIA before the close yesterday based on its relative weakness and netted an 80 cent gain today. We also shorted and covered SPY intraday for a 40 cent gain, so today was profitable despite the PPH hit.

Will be posting any other ETF setups as we find them.
 
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