How to Trade Equity ETFs, Diamonds, Spiders and QQQ as New Highs Continue

Diamonds set an all-time high of $290.04 on Jan. 10 with its annual risky level at $299.53. Spiders set a record $327.55 on Jan. 13 with its semiannual risky level at $329.37. QQQ is above its annual pivot at $215.71.
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The SPDR Dow Jones Industrial Average ETF  (DIA) - Get Report, the SPDR S&P 500 ETF Trust  (SPY) - Get Report and the PowerShares QQQ Trust ETF Series 1  (QQQ) - Get Report represent the Dow Jones Industrial Average, the S&P 500 and the Nasdaq 100.

The Dow ETF is known as Diamonds. The S&P ETF is called Spiders. The Nasdaq 100 ETF is known as QQQ.

The Dow Jones Industrial Average traded above 29,000 on Jan. 10 for less than a minute, but its annual and semiannual risky levels are 29,964 and 30,361. 

Diamonds set its all-time intraday high of $290.04 on Jan. 10 with its annual and semiannual risky levels at $299.53 and $303.59. 

The S&P 500 has semiannual and annual risky levels at 3,303.4 and 3,466.5. 

Spiders have semiannual and annual risky levels at $329.37 and $345.73.

The Nasdaq 100 set a new all-time high this morning as did QQQ, which is above its annual pivot at $215.71.

 Here are the weekly charts and key levels to track as volatility continues.

The Weekly Chart for Diamonds

The weekly chart for Diamonds. Courtesy of Refinitiv XENITH

The weekly chart for Diamonds. Courtesy of Refinitiv XENITH

The weekly chart for Diamonds is positive but extremely overbought, with the ETF above its five-week modified moving average at $284.03.

DIA is well above its 200-week simple moving average, or reversion to the mean, at $232.20.

The upper horizontal line is the annual risky level at $299.53. The semiannual risky level is above the chart at $303.59.

The 12x3x3 weekly slow stochastic reading ended last week at 94.27, well above the overbought threshold of 80 and above 90, putting Diamonds in an inflating parabolic bubble formation. 

The downside risk to the 200-week SMA is a bear-market decline of 20%.

The Weekly Chart for Spiders

The Weekly Chart for Spiders. Courtesy of Refinitiv XENITH

The Weekly Chart for Spiders. Courtesy of Refinitiv XENITH

The weekly chart for Spiders is positive but extremely overbought, with the ETF above its five-week modified moving average at $319.70. 

SPY is well above its 200-week simple moving average, or reversion to the mean, at $259.32. This average held at $234.71 during the week of Dec. 28, 2018. 

The downside risk is to the 200-week SMA if quarterly and monthly value levels fail to hold at $308.92 and $307.93, respectively. These are the horizontal lines that are next to each other. 

The semiannual and annual risky levels are the higher two horizontal lines at $329.37 and $345.73, respectively.

The 12x3x3 weekly slow stochastic reading ended last week at 95.27 well above the overbought threshold of 80 and above 90, putting Spiders in an inflating parabolic bubble formation.

The downside risk from the Jan. 10 all-time intraday high of $327.46 to the 200-week SMA is a bear-market decline of 21%.

The Weekly Chart for QQQs

The Weekly Chart for QQQ. Courtesy of Refinitiv XENITH

The Weekly Chart for QQQ. Courtesy of Refinitiv XENITH

The weekly chart for QQQs is positive but extremely overbought, with the ETF above its five-week modified moving average at $211.55. 

QQQ is well above its 200-week simple moving average, or reversion to the mean, at $155.69. The downside risk is to the 200-week SMA if the annual pivot at $215.71 and semiannual and quarterly fail to hold at $211.98 and $211.41, respectively. The monthly value level is $200.58. These are the horizontal lines on the chart, with the semiannual and quarterly levels represented by one line as they are so close together.

The 12x3x3 weekly slow stochastic reading ended last week at 95.73 well above the overbought threshold of 80.00 and above 90.00 putting QQQ’s in an “inflating parabolic bubble” formation.

The downside risk from the Jan. 10 all-time intraday high of $219.87 to the 200-week SMA is a bear-market decline of 27%.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were inputs to my proprietary analytics and resulted in new monthly, quarterly, semiannual and annual levels. Each uses the past nine closes in these time horizons.

New weekly levels are calculated after the end of each week. New monthly levels occur after the close of each month. New quarterly levels occur at the end of each quarter. Semiannual levels are updated at midyear. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the last 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

A reading above 90.00 is considered an inflating parabolic bubble formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being too cheap to ignore, which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.