Special Report from Watauga Equity Research. June 15, 2014. BLOWING ROCK, NC — A number of ETFs are becoming “overbought” with the Watauga ARC Index (WARC Index), but our proprietary, intermediate-term Accumulation Rankings have not deteriorated into bearish territory. Our conclusion in most cases is that while at least partial position liquidations are advisable, we have to be looking to re-establish long position when the WARC Index retreats to below the zero line and even more aggressive with a pullback to oversold (provided the Accumulation Rankings remain firm).
Charts courtesy of Worden Brothers TC2000
Market Vectors Oil Service ETF, Symbol: OIH, 6-13-2014 close: $55.21
Accumulation Rankings: ST = 62.00%; IT = 57.00%; LT = 53.50%
WARC Index: At +61, overbought, but still trending up
Our feature ETF chart this week is OIH (Market Vectors Oil Service, 6-13-2014 close: $55.21). Look back to the first half of 2011 in the OIH weekly chart, and notice the roughly 6-month period of sideways action before the ETF broke down. After the breakdown, that sideways consolidation pattern becomes “congestion area” overhead resistance and it proved challenging because it effectively halted advancing prices seven times. Earlier this year, in late January, OIH gave us a good buying opportunity before making a final assault on resistance. With Friday’s close at $55.21, OIH has upward momentum and seems destined to shake the last vestiges of that congestion area resistance dating back to 2011. With the move by WARC into overbought territory, more cautious traders should look to peel off some value here and wait for another entry point. More aggressive traders would consider giving OIH a chance to trade higher, either letting prices come into higher offers or wait until WARC ticks flat or down on a weekly basis.
iShares MSCI Taiwan Index Fund ETF, Symbol: EWT, 6-13-2014 close: $15.35
Accumulation Rankings: ST = 60.00%; IT = 55.00%; LT = 52.50%
WARC Index: At +53, overbought, but still trending up
Similar to OIH, this country-specific ETF focused on the Taiwan equity market etched out a congestion area pattern from late 2010 into the third quarter of 2011 before it broke decisive down. There were two B3 signals (not pictured) in December 2011 and in late May 2012, followed by a series of S1 signals and re-commitments leading to the current advance midway into the price range represented by the 2011 congestion area. Our WARC Index is still trending up and the Accumulation Rankings favorable, so we would lighten up, but let prices come into our (higher) offers until WARC ticks down.
Market Vectors Semiconductor ETF, Symbol: SMH, 6-13-2014 Close: $48.86
Accumulation Rankings: ST = 60.00%; IT = 57.00%; LT = 57.50%
WARC Index: At +73, overbought, but still trending up
SMH is another strong-trending sector that has been difficult to “play”. Our Accumulation Rankings have given great clues to maintain a bullish orientation throughout this advance. Now, SMH prices, Accumulation Rankings, and the WARC Index are very extended. While it is foolhardy to think about short positions until Accumulation Rankings deteriorate, we would not be averse to taking money off the table here. That said, by going to new highs there is no natural overhead resistances so, with strong Accumulation Rankings and a still uptrending WARC Index, for now we would let prices come into our higher offers in lightening up on long positions.
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