The trend is your friend is an old stock market saying that even most people who don’t invest can recite. Last week, the indexes ran into trouble when they traveled beyond 52-week closing highs, and some people are wondering if the June 4th initiated run is about over.
Atlanta Federal Reserve President, Dennis Lockhart put the brakes on the rally by uttering dangerous words, further easing is no “panacea.” Well, at the very minimum, it sure makes Wall Street’s algorithms feel a lot better.
By the time Friday rolled around, stocks got back on track as the boss, Ben Bernanke, said there is room for the central bank to do more. Now, that felt a lot better and the headline reading computer models resumed buying.
Despite gains to end the week, the NASDAQ lost ground for the first time in six weeks. Meanwhile, it was the first red week for the Dow and S&P in seven weeks. Although the losses were mild, the action created a few technical warning flares on the index charts.
Like ETF Stocks mentioned up top, the trio of major indexes failed in their attempts to make highs. The inability to breakout could harden resistance, and the lack of reaching new, higher highs are warning signs. Add in bearish MACD crossovers for the Dow and S&P, and chart watchers have reason to believe some short-term trouble could be ahead.
The question then becomes, is it an opportunity to buy or take profits before the storm? The answer brings us back to the trend being like a dog for men and diamonds for women. (Tells you who the smarter sex really is, doesn’t it?)
Equities are clearly trading in an ascending channel and are much closer to the top barrier than the bottom. As long as the NASDAQ stays above 2,950ish, the Dow on top of 12,900ish, and the S&P on the better side of 1,375, then the trend intact.
Until the markets move outside of the guardrails which have contained every dip, dive and drive higher, investors might consider adding index Exchange traded funds like PowerShares QQQ (QQQ) at strategic points.
ETF Stocks sees 3,000 and 2,950 as X marks the spots to buy the dip should QQQ falter. On the other hand, if the index convincing busts out to new 2012 heights, then a leveraged exchange-traded-fund such as ProShares Ultra QQQ (QLD) could double your breakout fun.
On the flip side, should the bottom rails give way, then the trend will be broken and investor might look the other way with ProShares UltraShort QQQ (QID). Fortunately, three of our four scenarios favor a bullish outcome and friendly for investors.