Pullback A Healthy Sign For Stock ETFs

Jerry Slusiewicz
Saturday March 28, 2009, 3:00 am EDT

http://finance.yahoo.com/news/Pullback-A-Healthy-Sign-For-indexuniverse-14784640.html

The S&P 500 pulled back a bit on Friday. But volume on major stock exchanges was relatively low, which is actually a healthy sign.

In fact, we'd like to see the blue chip index fall to around the 750-790 range in coming weeks, from the current level of 820.

The current rally, which started on March 6, has just come too far in too fast of a time frame. It has been a fairly broad rally, though. If the month ended right now, we'd be looking at the best monthly returns since 1974. In the past three weeks, the S&P 500 index has jumped 22.4%.

While that's great, it's more constructive at this point to have a moderate retracement. That doesn't mean we need to see the index retest the 666 mark, its 12-year low. But even a pullback of some 8.5% to 750 would still provide support for a longer-term rally.

If stocks continue to climb, technical factors indicate that the S&P 500 will hit considerable resistance at the 875-880 range. That would represent about another 8% rise from current levels.

Today, some 70% of stocks on the New York Stock Exchange have moved above their 50-day moving average. Again, that indicates the market has moved too far and too fast. Look at Jan. 6, when 80% of stocks were trading above their 50-day moving averages. The result was a sharp correction to multiyear lows.

So from a technical perspective, the safe move for a broad-based fund such as the SPDRs S&P 500 ETF (NYSEArca:SPY - News) would be to wait until it's trading around $75 a share. It closed on Friday at $81.59. So we're looking for about an 8% fall to signal a more reasonable entry point.

The same reasoning holds for the PowerShares QQQ (NasdaqGM:QQQQ - News). The Tech-heavy ETF closed at $30.82 per share on Friday. Technically speaking, a better entry point would be $28 per share. On Oct. 24, 2008, the ETF hit a low for this current cycle at $28.09. From early December 2008 through the end of February 2009, its low range was right around $28. And QQQ's 20-day moving average is right at that point now.

Another note of caution is that the market rose 6.2% last week—the first time we've seen three up-weeks in a row in almost a year. Although that's pretty good, it still isn't enough to guarantee that this rally is a new bull market.