How to Trade These Equity ETFs as the Coronavirus Bear Market Begins

Transports are already in a bear market with small caps close behind. The Dow,S &P 500 and Nasdaq 100 remain above their Feb. 28 lows.
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When analyzing the weekly charts for the stock market you must look at these five equity ETFs.

The SPDR Dow Jones Industrial Average ETF  (DIA) - Get Report (known as Diamonds) represents the Dow Jones Industrial Average which traded as low as 24,681 on Feb. 28.

The SPDR S&P 500 ETF Trust  (SPY) - Get Report (known as Spiders) represents the S&P 500 which traded as low as 2,855.84 on Feb. 28.

The PowerShares QQQ Trust ETF Series 1 (known as QQQs) represents the Nasdaq 100 which traded as low as 8,133.85 on Feb. 28.

The iShares Transportation Average ETF  (IYT) - Get Report represents the Dow Jones Transportation Average which traded as low as 8,659.63 on March 6. This average is in bear market territory.

The iShares Russell 2000 ETF  (IWM) - Get Report represents the Russell 2000 small-cap index which traded as low as 1,434.41 on March 6.

Let’s Study the Weekly Charts

These charts show weekly bars going back five years.

The horizontal lines represent value levels and risky levels from my proprietary analytics.

The red line trading through the price bars are the five-week modified moving average.

The bold green line is the 200-week simple moving average which I consider the technical “reversion to the mean.”

The study along the bottom of the chart is the 12x3x3 weekly slow stochastic readings which scales from 00 to 100. A reading above 80 is overbought. A reading above 90 identifies an “inflating parabolic bubble” formation. A reading below 20 is oversold. A reading below 10 identifies a “too cheap to ignore” formation.

The Weekly Chart for Diamonds

Weekly Chart For Diamonds

Weekly Chart For Diamonds

Courtesy of Refinitiv XENITH

The weekly chart for Diamonds is negative with the ETF below its five-week modified moving average at $$276.55. The downside risk is to its 200-week simple moving average or “reversion to the mean” at $235.81.

The 12x3x3 weekly slow stochastic reading is projected to decline to 61.17 this week down from 74.00 on Feb. 28. 

In mid-January this reading was above the 90.00 threshold putting Diamonds in an “inflating parabolic bubble” formation. This bubble is now popping with the ETF down 14.5% from its all-time intraday high of $295.87 set on Feb. 12.

Trading Strategy: Reduce holdings on strength to its quarterly pivot at $273.94. Buy weakness to the 200-week SMA at $235.55.

The Weekly Chart for Spiders

Weekly Chart For Spiders

Weekly Chart For Spiders

Courtesy of Refinitiv XENITH

The weekly chart for Spiders is negative with the ETF below its 5-week modified moving average at $316.57. 

The downside risk is to its 200-week simple moving average or “reversion to the mean” at $263.36. This average held at $234.71 during the week of Dec. 28, 2018.

The 12x3x3 weekly slow stochastic reading is projected to slip to 66.85 this week 83.29 this week down from 80.17 on Feb. 28. 

This reading was above 90 during the week of Jan. 24 in an “inflating parabolic bubble” formation. The ETF is down 13.5% from its all-time intraday high of $339.08 set on Feb. 19.

Trading Strategy: Investors had the opportunity to reduce holdings at its February monthly risky level at $336.86 last week. SPY is now below its semiannual pivot at $329.37 and below its quarterly value level at $308.92. Buy weakness to the 200-week SMA at $263.36.

The Weekly Chart for QQQs

Weekly Chart For QQQs

Weekly Chart For QQQs

Courtesy of Refinitiv XENITH

The weekly chart for QQQs is negative with the ETF below its 5-week modified moving average at $217.05. This indicates risk to its 200-week simple moving average or “reversion to the mean” at $159.66.

The 12x3x3 weekly slow stochastic reading is projected to decline to 69.75 down from 83.90 on Feb. 28. 

This reading was above 90 during the week of Feb 14 which put the ETF in an “inflating parabolic bubble” formation. This bubble has popped with the ETF now 13.8% below its all-time intraday high or $237.47 set on Feb. 19.

Trading Strategy: Its monthly pivot for February at $227.64 failed to hold as a warning. Sell strength to its semiannual and annual pivots at $211.98 and $215.71, respectively. Buy weakness to the 200-week SMA at $159.66.

The Weekly Chart for IYT

Weekly Chart For IYT

Weekly Chart For IYT

 Courtesy of Refinitiv XENITH

The weekly chart for IYT is negative with the ETF below its 5-week modified moving average at $184.23. 

This ETF is also below its 200-week simple moving average or “reversion to the mean” at $177.43. The ETF is close to testing its Dec. 24, 2018 low of $155.24.

The 12x3x3 weekly slow stochastic reading is projected to decline to 37.56 this week down from 44.26 on Feb. 28. 

The ETF is already in bear market territory 25.1% below its all-time intraday high of $209.43 set on Sept. 14, 2018. This has been a negative divergence for a long time.

Trading Strategy: Sell strength to the monthly and quarterly risky level at $182.45 and $185.15, respectively. There may be a trading bounce on a test of the Dec. 24, 2018 low of $155.24.

The Weekly Chart for IWM

Weekly Chart For IWM

Weekly Chart For IWM

Courtesy of Refinitiv XENITH

The weekly chart for IWM is negative with the ETF below its 5-week modified moving average at $157.82. 

This ETF is also below its 200-week simple moving average or “reversion to the mean” at $146.81.

The 12x3x3 weekly slow stochastic reading is projected to decline to 50.21 this week down from 61.24 on Feb. 28. 

This reading was above 90 during the week of Jan. 17 put the ETF in an “inflating parabolic bubble” formation. 

This bubble has popped with the ETF now 17.7% below its all-time intraday high or $173.39 set way back on August 31, 2018.

Trading Strategy: Sell strength to its monthly and quarterly risky levels at $154.02 and $160.72, respectively. I do not show a value level. Its Dec. 24, 2018 low is $125.84.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019 were inputs to my proprietary analytics. Quarterly, semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.

Monthly levels for March were established based upon the February 28 closes.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. 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.