
Technical Trades to Extend Stock Gains as the Fed Prints Money
Central bankers around the world have pledged additional monetary stimulus, which will continue to delay the Federal Reserve's decision to make that first rate hike. As a result of continued global money printing, all five U.S. major averages continued their fourth-quarter rally. This has three out of five of them at or above key technical levels that have been in play in October.
Market strategists are concentrating on the big-cap stocks of the Dow 30 and the S&P 500, and the momentum technology stocks of the Nasdaq say the bull market remains intact. But not so fast -- Dow Transports and small-caps are still in correction territory, and all five major averages must set new highs to show that the upside of the fourth quarter is the next leg of the bull market.
Last week, the Bank of Japan pledged to add more stimulus when it meets on Oct. 30. This followed a report that Japanese exports were at the slowest pace in more than a year. The European Central Bank indicated that additional quantitative easing is on the table. And on Friday, after the close in China, the Chinese central bank cut interest rates for the sixth time since November 2014.
Let's take a look at this week's scorecard, the technical charts and the key levels.
The Dow Jones Industrial AverageI:DJI closed at 17,647 on Friday, up 8.4% so far in the fourth quarter, cutting the year-to-date loss to just 1%. The average is now 3.8% below its all-time intraday high of 18,351.35 set on May 19.
This average is above its key monthly level of 17,539, which indicates upside potential to higher highs of 18,603 to 18,802 by the end of 2015. However, if there's another bungee decline, this average can plunge to as low as 14,557.
Here's how to trade the Dow 30 using the SPDR Dow Jones Industrial Average ETF (DIA) - Get Report , a.k.a. Diamonds. Here's the daily chart for Diamonds.
Courtesy of MetaStock Xenith
Diamonds had a close of $176.37 on Friday, down just 0.8% year to date. It is up 8.5% so far in October, and is 3.8% below its all-time intraday high of $183.35, set on May 20. This ETF is above its Sept. 17 Fed Open Market Committee high of $169.44, and is above $170.88, which is the 61.8% Fibonacci Retracement of the decline from the all-time high of $183.35 set on May 20 and the Aug. 24 "Black Monday" low of $150.57. The high following July 29 is $177.73.
Investors looking to buy Diamonds should place a good till canceled limit order to buy the ETF if it drops to the 61.8% retracement of $170.79. This week's key level is $169.68.
Investors who entered good till canceled limit orders to sell this ETF at $175.23 were filled at Friday's open of $176.00. Investors looking to reduce holdings should place a good till canceled limit order to sell the ETF if it rises to $185.58, which is a key level on technical charts until the end of 2015.
The S&P 500 I:GSPC had a close of 2,075.2 on Friday, up 8.1% so far in the fourth quarter and up 0.8% year to date. It is 2.8% below its all-time intraday high of 2,134.72, set on May 20. The upside potential into the Oct. 28 FOMC meeting is a key monthly level of 2,081.8, which was nearly tested on Friday. A higher high of 2,156.6 is feasible by year end, but given a sharp reversal, the downside risk is to as low as 1,558.2.
Here's how to trade the S&P 500 using the SPDR S&P 500 ETF Trust (SPY) - Get Report , a.k.a. Spiders. Here's the daily chart of the Spiders.
Courtesy of MetaStock Xenith
Spiders had a close of $207.51 on Friday, up 1% year to date, and up 8.3% so far in October. It is 2.9% below its all-time intraday high of $213.78, hit on May 20. This ETF is above its Sept. 17 FOMC high of $202.89, and is above $201.82, which is the 61.8% Fibonacci Retracement of the decline from the all-time high of $213.78 set on May 20 and the Aug. 24 "Black Monday" low of $182.40. The high following the July 29 FOMC meeting was $211.45.
Investors looking to buy Spiders should place a good till canceled limit order to buy the ETF if it drops to the 61.8% retracement of $201.82. This week's key level is $199.13.
Investors who entered good till canceled limit orders to sell at $204.97 were filled last Thursday. Investors looking to reduce holdings should place a good until canceled limit order to sell the ETF if it rises to $208.07, which is a key level on technical charts until the end of October. The next key technical level is $215.18, which is good until the end of 2015.
The Nasdaq CompositeI:IXIC had a close of 5,031.86 on Friday, and the Nasdaq 100 had a close of 4,624.09. These tech-heavy indices are up 8.9% and 10.6%, respectively, so far this quarter, and up 6.2% and 9.2% year to date, respectively. These indices are 3.8% and 1.5% below their all-time intraday highs of 5,231.94 and 4,694.13, respectively, which were both set on July 20.
My proprietary analytics indicated that it would be difficult for these averages to set new highs, given key technical levels of 5,061 and 4,589, respectively. The Nasdaq Composite is below its key level, while the Nasdaq 100 is above. There's an outside chance of seeing highs of 5,146 to 5,371 for the Nasdaq and 4,874 for the Nasdaq 100. The downside risks on a bungee jump are key levels down at 3,901 and 3,660, respectively. Here's how to trade the Nasdaq.
Here's the daily chart of the QQQs.
Courtesy of MetaStock Xenith
QQQs had a close of $112.78 on Friday, up 9.2% year to date and up 10.8% so far in October. It is just 1.4% below its all-time intraday high of $114.39, set on July 20. This ETF is above its Sept. 17 FOMC high of $108.73, and is above its 50-day and 200-day simple moving averages of $105.34 and $107.20, respectively. It's also well above the 61.8% Fibonacci Retracement at $103.09 of the decline from the July 20 high of $114.39 to the Aug. 24 "Black Monday" low of $84.74.
Investors looking to buy QQQs should place a good till canceled limit order to buy the ETF if it drops to a key level on technical charts of $107.76, in play for this week. The 61.8% retracement is $103.09. The third buy level is the 50% retracement of $99.58.
Keep in mind that the flash crash low of $84.74 set on "Black Monday", Aug. 24, was between key levels of $89.42 and $78.81, which remain in play until the end of the year.
Investors who entered good till canceled limit orders to sell at $110.87 or $111.92 were filled at Friday's open of $112.66. Investors looking to reduce holdings should place a good until canceled limit order to sell the ETF if it rises to $118.40, which is a key level on technical charts until the end of 2015.
The Dow Jones Transportation AverageI:DJT had a close of 8,295.58 on Friday, up 6.5% so far in the fourth quarter. That cuts the year-to-date loss to 9.2%, but it is still in correction territory -- 10.9% below its all-time intraday high of 9,310.33, set on Nov. 28, 2014. The upside potential into the Oct. 28 FOMC meeting is a key semiannual level of 8,495, last tested on Aug. 5.
Failure to hold a key weekly level of 8,209 and a monthly level of 7,919 is a warning for the overall stock market. The odds of seeing a new high is next to zero, and the downside risk is to 7,289 by year end, below the Aug. 24 low of 7,452.70.
Here's how to trade Dow Transports using the Dow Transports ETF (IYT) - Get Report . Here's the daily chart for the Transports ETF.
Courtesy of MetaStock Xenith
Transports had a close of $149.15 on Friday, down 9.1% year to date, but up 6.6% so far in October. It is in correction territory -- 11.1% below its all-time intraday high of $167.80, set on Nov. 28. This ETF is still below its Sept. 17 FOMC high of $149.86 and its post-July 17 FOMC high of $153.03. The ETF is above its 50% and 38.2% Fibonacci Retracements of $148.03 and $143.35, respectively, and below its 61.8% retracement of $152.71. These retracements are measured from the all-time high of $167.80, set on Nov. 28, to the "Black Monday" low of $128.28, set on Aug. 24.
Investors looking to buy Transports should place a good till canceled limit order to buy the ETF if it drops to $130.34, which is a key level on technical charts until the end of the year, and last tested on "Black Monday."
Investors who entered good till canceled limit orders to sell at $148.03 were filled on Thursday. Investors looking to reduce holdings should place a good till canceled limit order to sell the ETF if it rises to $173.65 and $176.43, which are key levels on technical charts until the end of 2015.
The Russell 2000 had a close of 1,166.05 on Friday, up 5.9% so far in the fourth quarter, cutting the year to date loss to 3.2%. But it is still in correction territory, 10% below its all-time intraday high of 1,296.00 set on June 23. The upside potential into the Oct. 28 FOMC meeting is to match the Sept. 17 FOMC high of 1,194.00.
The small-cap index is well below its post-July 29 FOMC high of 1,244.98. The odds of seeing a new high is next to zero, and the downside risk is to 954.08 by year-end, still above the Sept. 29 low of 1,078.63.
Here's how to trade small-caps using the iShares Russell 2000 ETF (IWM) - Get Report . Here's the daily chart for the iShares Russell 2000 ETF.
Courtesy of MetaStock Xenith
The small-cap ETF had a close of $115.85 on Friday, down 3.2% year to date. It is up 6.1% so far in October, but is still in correction territory -- 10.3% below its all-time intraday high of $129.10, set on June 24. This ETF is just above its 38.2% retracement at $115.42, and below its 50% Fibonacci Retracement of $118.04. These retracements are measured between the all-time high of $129.10, set on June 24, and its Sept. 29 low of $106.99, which is below the "Black Monday" low of $108.26. The small-cap ETF is below its Sept. 17 FOMC high of $118.89, and well below its post-July 29 FOMC high of $123.67.
Investors looking to buy the small-cap ETF should place a good till canceled limit order to buy the ETF if it drops to the 23.6% retracement of $112.19. The risk into the end of 2015 is key levels of $97.04 and $94.97.
Investors looking to reduce holdings should place a good till canceled limit order to sell the ETF if it rises to the 50% retracement of $118.04.
This article is commentary by an independent contributor. At the time of publication, the author held no positions in the stocks mentioned.














