Investors have been riding the stock market momentum train for weeks and are ignoring the technical indicators that show upside potential appears to be limited.
Despite four of the five major stock averages reaching new 2016 highs on Friday, all five have experienced lower highs for the last eight to 16 months, which are bear market down trends.
The weekly charts for five major equity averages are positive but the dynamics are different for each one. The Dow Jones Industrial Average (INDU) , the S&P 500
Dow Transports now has an overbought weekly chart after setting its 2016 high of 8,114.27 on March 21. The Nasdaq may have set a new 2016 high of 4,917.09 on April Fool's Day, but that level is below the Dec. 31 low of 5,007.01. The Russell 2000 traded as high as 1,118.39 on April 1, but this is below the Dec. 31 low of 1,135.57 and below the Jan. 4 open and high of 1,134.07.
Investors need to know these negative divergences as they trade the five exchange-traded funds that represent these averages.
Here are the weekly charts for the corresponding ETFs.
The weekly charts below show a red line through the price bars. which is the key weekly moving average (a five-week modified moving average). The green line is the 200-week simple moving average considered the "reversion to the mean." The study in red along the bottom of the chart is weekly momentum (a 12x3x3 weekly slow stochastic), which scales between 00.00 and 100.00, where readings above 80.00 indicates overbought and readings below 20.00 indicates oversold. A negative weekly chart shows the stock below its key weekly moving average with weekly momentum declining below 80.00 in a trend towards 20.00.
We start with the SPDR Dow Jones Industrial Average ETF (DIA) , aka Diamonds.
Courtesy of MetaStock Xenith
The weekly chart for Diamonds ($177.72 on April 1) is positive with the ETF above its key weekly moving average of $171.64 and well above its 200-week simple moving average of $159.54. Notice how weakness to the 200-week provided buying opportunities during "Black Monday" on Aug. 24 and again during the weeks of Jan. 22 and Feb. 12.
The weekly momentum reading rose to 77.28 on April 1 up from 68.15 on March 25 and will soon be overbought above the 80.00 threshold.
Investors looking to buy Diamonds should consider doing so on weakness to $165.07, which is a key level on technical charts until the end of April. Investors looking to reduce holdings should do so on strength to $179.90 and $182.24, which are key levels on technical charts until the end of this week and until the end of June, respectively. This potential upside is shy of the all-time high of $183.35 set on May 20.
SPDR S&P 500 ETF Trust (SPY) , aka Spiders
Courtesy of MetaStock Xenith
The weekly chart for Spiders ($206.92 on April 1) is positive with the ETF above its key weekly moving average of $200.61 and well above its 200-week simple moving average of $181.41. The weekly momentum reading rose to 76.01 on April 1 up from 67.73 on March 25 and will soon be overbought above the 80.00 threshold.
Investors looking to buy Spiders should consider doing so on weakness to $191.26, which is a key level on technical charts until the end of the week. Investors looking to reduce holdings should do so on strength to $211.66 and $216.80, which are key levels on technical charts until and end of this week and the end of June, respectively. This implies that a potential new all-time high is feasible, above the May 20 high of $213.78.