The Parabolic Bubbles For Diamonds, Spiders, Nasdaq 100 ETFs Are Popping

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Includes: DIA, IWM, IYT, QQQ, SPY
by: Richard Suttmeier
Summary

The Dow 30 ETF (Diamonds), S&P 500 ETF (Spiders) and Nasdaq 100 ETF set ‘melt-up’ highs of $265.93, $286.58, $170.95 on Jan. 26, respectively.

The Transportation ETF could not hold its annual pivot of $204.61, and Russell 2000 stayed below its annual risky level of $165.04.

Rising interest rates and the unwinding of quantitative easing to shrink the Federal Reserve balance sheet caused the equity bubbles to pop.

On Friday, January 26 the exchange-traded funds known as Diamonds, Spiders and Nasdaq 100 QQQs closed right at their all-time intraday highs of $265.93, $286.62 and $170.95, respectively. It is a rare occurrence that I call a ‘melt-up’. This happens when you see panic buying as everyone wants to be fully invested and no one wants to be short.

This is the opposite of the meltdown that ended the crash of 2008 on March 9, 2009. At those lows margin calls forced out longs and long-term investors stopped adding to core portfolio holdings. This meltdown proved to be the buying opportunity of the century.

Why did the market rally so much between March 2009 and January 2018? Low interest rates and quantitative easing caused the Federal Reserve balance to balloon to about $4.5 trillion.

The cause of market weakness since Jan. 26 is rising Treasury yields as the Federal Reserve continues to raise the federal funds rate and begins phase two in the unwinding of the Federal Reserve balance sheet. Started in January, the Federal Reserve began to vaporize $20 billion of money a month. Money printing caused the stock market rally. Destroying money causes the stock market bubble to pop.

The major equity averages continue to have elevated P/E ratios: 25.09 for the Dow 30 down from 28.45 a week ago; 21.71 for the S&P 500 down from 23.34 a week ago; 26.10 for the Nasdaq down from 27.82 a week ago; 13.48 on Dow Transports down from 15.21 a week ago; and 151.45 for the Russell 2000 up from 145.15 a week ago.

The Scorecard For These Equity ETFs

Scorecard For The 5 Equity ETF Here’s how to trade the equity ETFs based upon weekly charts and key trading levels.

The weekly charts show horizontal lines that represent the value levels, pivots or risky levels.

SPDR Dow Jones Industrial Average ETF (DIA)

Weekly Chart For Diamonds Courtesy of MetaStock Xenith

The weekly chart for Diamonds ($243.27 on Feb. 5) will be downgraded this week given a close below the five-week modified moving average of $251.09. The 12x3x3 weekly slow stochastic reading is projected to end this week at 84.90 down from 94.48 on Feb. 2, as the parabolic bubble pops.

Given this chart and my analysis, buy weakness to my quarterly and semiannual value levels of $242.48 and $230.11, respectively, and reduce holdings on strength to my monthly and weekly risky levels of $261.56 and $264.82, respectively, both below the all-time high of $265.93. My annual pivot is $246.52.

SPDR S&P 500 ETF Trust (SPY)

Weekly Chart For Spiders Courtesy of MetaStock Xenith

The weekly chart for Spiders ($263.93 on Feb. 5) will be downgraded if the ETF ends the week below its five-week modified moving average of $271.92. The 12x3x3 weekly slow stochastic reading is projected to end this week at 83.29 down from 94.13 on Feb. 2, still above the overbought threshold of 80.00 but no longer above 90.00 as the parabolic bubble pop.

Given this chart and my analysis, buy weakness to my semiannual value level of $264.10 which was tested on Monday. My quarterly pivot is $266.66. Reduce holdings on strength to my annual and monthly pivots are $276.34 and $278.58, respectively.

PowerShares QQQ Trust ETF (QQQ)

Weekly Chart For Nasdaq 100 QQQ Courtesy of MetaStock Xenith

The weekly chart for QQQs ($158.12 on Feb. 5) will be downgraded to neutral if the ETF ends this week below its five-week modified moving average of $161.50. The 12x3x3 weekly stochastic reading is projected to end this week at 84.04 down from 92.91 on Feb. 2 still above the overbought threshold of 80.00 but below the 90.00 threshold as a sign of a popping parabolic bubble.

Given this chart and my analysis, buy weakness to my annual, semiannual and quarterly value levels of $156.14, $154.54 and $150.56, respectively, and reduce holdings on strength to my monthly pivot at $164.13.

iShares Transportation Average ETF (IYT)

Weekly Chart For The Transportation ETF Courtesy of MetaStock Xenith

The weekly chart for the Transportation Sector ETF ($186.54 on Feb. 5) will be downgraded to negative if the ETF closes below its five-week modified moving average of $192.71. The 12x3x3 weekly slow stochastic reading is projected to decline to 79.24 this week down from 87.35 on Feb. 2 falling below the overbought threshold of 80.00.

Given this chart and my analysis, buy weakness to the 200-day simple moving average which is rising from $175.73. My semiannual pivot is $188.79. Reduce holdings on strength to my quarterly, monthly and annual risky levels of $194.69, $197.18 and $204.61, which are well below the all-time high of $206.73.

iShares Russell 2000 ETF (IWM)

Weekly Chart For The Russell 2000 ETF Courtesy of MetaStock Xenith

The weekly chart for the small caps ETF ($147.92 on Feb. 5) will be downgraded to negative it the ETF ends the week below its five-week modified moving average of $153.56. The 12x3x3 weekly slow stochastic reading is projected to end the week at 74.71 down from 86.73 on Feb. 2 moving below the overbought threshold of 80.00.

Given this chart and my analysis, buy weakness to my semiannual value level of $144.99, and reduce holdings on strength to my quarterly, monthly and annual risky levels of $157.64, $161.11 and $165.04, respectively, versus the all-time high of $160.62.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.