Key 3rd-Quarter Pivot Levels

by Tom Aspray

Stocks celebrated the 4th of July with some low-volume fireworks of their own. The minor mid-week correction does look like a dip that should have been bought even though just the initial support levels were tested.

Asian stocks were under pressure on weak data out of China as the Shanghai Composite was down over 2%. In contrast, the European markets are strong in early trading with the German Dax up over 2%. The US futures are showing nice gains in early trading and a close above the June highs will confirm that the correction is over.

Pivot point analysis can be an important tool in helping determine the short-, intermediate-, as well as the longer-term trend. As I discussed in The Most Powerful Pivot Level, the quarterly pivots introduced to me by John Person provide some valuable insights into the market’s trend.

The Spyder Trust (SPY) started off the year by gapping above the quarterly pivot on the first trading day of the year and held well above the quarterly pivot for all of the 2nd quarter.

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In the above table, I have listed the quarterly pivot levels including the R1 & R2 resistance, as well as the S1 & S2 support levels for 13 of the key ETFs along with the cash S&P 500.

Though SPY traded below its 3rd quarter pivot briefly last week, it closed Friday well above it. All of those markets highlighted in green ended the 2nd quarter above the 3rd quarter pivot level. The Consumer Staples Sector SPDR Fund (XLP), Materials Select Sector SPDR Fund (XLB), and Utilities Select Sector SPDR Fund (XLU) closed on Friday below their 3rd quarter pivot levels and they are highlighted in red.

A look at how some of the key markets acted with regard to their quarterly pivot levels will help you navigate this new quarter. I suggest that you print out this table and refer to it this quarter as these ETFs often turn once their pivot levels are reached.

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Chart Analysis: The weekly chart of the Spyder Trust (SPY) shows that the April low at $153.55 held well above the 2nd quarter pivot at $152.65.

• The decline in late June took the SPY to a low of $157.42 and closed June at $160.42.
• The July 1 open was above the 3rd quarter pivot at $161.01 and it closed last week over 1% above its pivot.
• The R1 resistance is at $168.48, which is just below the May high of $169.07. The weekly starc+ band is at $170.57.
• The weekly on-balance volume (OBV) closed back above its WMA last week and it needs to continue higher this week to complete its consolidation formation.
• The S&P 500 A/D line (not shown) rose sharply last week and now has moved well above the June highs.
• The 20-week EMA is now at $158.97.

The PowerShares QQQ Trust (QQQ) ended June at $71.27, which was above the 3rd quarter pivot at $71.03.

• There is next resistance at $73.72-$73.76 with the R1 resistance at $75.19, which is just above the May highs at $74.95.
• The weekly starc + band is at $76.21 for this week.
• The weekly relative performance appears to have completed its bottom formation as it has closed above the resistance at line b (see arrow).
• The RS line had formed higher lows, line c.
• The weekly OBV is back above its WMA but is still below the long-term resistance at line d.
• On a drop below the quarterly pivot at $71.03, the 20-week EMA is at $70.74 with the recent low at $69.15.

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The iShares Russell 2000 (IWM) closed June at $97.00, which was well above the 3rd quarter pivot at $95.50, and it closed the weekly just below the key swing high of $99.70.

• The May high was $100.38 with the R1 resistance for this quarter at $101.88.
• The weekly starc+ band is at $103.91.
• The relative performance has closed above the resistance at line a, that goes back to early 2012.
• This indicates that the small-cap Russell 2000 is now outperforming the S&P 500.
• The RS line is well above its WMA and the longer-term support at line b.
• The weekly OBV is now above its WMA after breaking its uptrend (line c) four weeks ago.
• This makes the close this week more important as it would be good to see higher volume than last week’s levels.
• There is initial support at $97.45 and then the quarterly pivot $96.60.
• The 20-day EMA is at $94.89.
• The chart shows that the 2nd quarter pivot at $91.50 was violated for nine days in March (see circle #1) as the low was $89.21.

The iShares Dow Jones Transportations (IYT) ended June at $109.89, which was below the 3rd quarter pivot at $110.53.

• IYT did close last week on its highs but is still well below the June highs at $114.41.
• The R1 resistance is at $116.66 with the May high at $117.30 and weekly starc+ band at $119.17.
• The relative performance still shows a pattern of lower highs, line c, and is below its WMA.
• The daily RS line (not shown) appears to be bottoming but it has not been completed yet.
• The weekly OBV held above its WMA on the recent correction and a move above the prior peak would be even more bullish.
• The daily OBV (not shown) is still below its WMA.
• The June low was at $106.30, which was above the 2nd quarter pivot at $105.99.

What it Means: All of the markets except the Consumer Staples Sector SPDR Fund (XLP), Materials Select Sector SPDR Fund (XLB), and Utilities Select Sector SPDR Fund (XLU) are positive based on the quarterly pivot analysis.

If the iShares Dow Jones Transportations (IYT) can become a market-leading sector, it will be a further positive for the overall market. I still cannot rule out one more sharper one-two-day pullback before the market challenges the previous highs.

How to Profit: For the PowerShares QQQ Trust (QQQ), go 50% long at $71.34 and 50% at $69.78, with a stop at $68.67 (risk of approx 2.7%).

For the iShares Russell 2000 Index (IWM), go 50% long at $97.68 and 50% at $96.36, with a stop at $93.69 (risk of approx 3.4%).

Portfolio Update: For the iShares Dow Jones Transportations (IYT), should be 50% long at $110.18 and 50% long at $109.42, with a stop at $105.44 (risk of approx. 3.7%).

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