ETFs Affirm This Unbelievable Bullishness (QQQQ, SPY)

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We all know the ride’s going to end sometime, but in the meantime (and until further notice) it’s still a trade-worthy ride. What is it? It’s this bullishness. Yes, it’s overextended, hard to believe, against the odds, and….. not a bit surprising to us?

One of the greatest parts about being disciplined enough to stick to a proven trading methodology is that you really don’t have the option – in a good way – of convincing yourself it’s “alright to ignore the evidence just this once”. Either something is bullish, or it isn’t. One of Price’s oldest and most successful of bull/bear methodologies like these can be applied by making of just two ETFs. Which ones? The S&P 500 SPDRs Fund (SPY) and the NASDAQ 100 Trust (QQQQ). Here’s the gist.

You’re probably aware that the market’s different indices – and different ETFs – tend to move in tandem with the market’s bigger trend. What’s not quite as recognized, however, is that the NASDAQ tends to lead the way with stronger moves, both up and down.

The practical application of such a theme is two-fold. First, spotting this relative strength of the QQQQ’s over the SPDRs (or QQQQ’s under the SPDRs, in bearish cases) can identify new trends as they emerge. Second, and perhaps better, by waiting for the NASDAQ’s relative leadership, you can distinguish the real emerging trends from the fakeouts.

A couple of examples will really nail down the premise.

On the chart below, we’ve plotted the percentage change of QQQQ versus the percentage change of SPY since August 31st. when the market made a sharp and unexpected reversal. At the bottom is the S&P 1500….. most of the market. See the clear and widening divergence between the SPDRs and the QQQQ’s? It was the biggest disparity we’d seen in months, at the same we saw biggest and prolonged gain for the market that’s we’d seen in months.

QQQQ Relative Strength Over SPY

Here’s another example…. the big rally from February 5th through April 23rd. That 15% gain was marked by a clear bullish divergence between QQQQ and SPY starting on March 1st (and really before then).

QQQQ Relative Strength Over SPY

How about a bearish example (yes, it works that way too)? Remember the market’s implosion from late September 2008? We actually got an early warning in early September 2008. Several days before the market even started to tumble lower in a big way, the QQQQ’s started to slide lower at a notably faster pace than the SPYders did.

SPY Relative Strength Over QQQQ

You get the idea. Though not every single one of the market’s major turns are marked this distinctly, the vast majority of them are.

In any case, this is just one of the many ways to use ETFs in a ways beyond just owning them (though we offer that ETF-picking service as well). Look for more exchange-traded funds strategies and tips later this week.

Andrew Hart – ETFTRADR.com