FSO Editorials: "ETF Recon III" by Fernando Gonzalez for OTA 02/26/2007

ETF Recon III
Weekly Review with Fernando Gonzalez
Online Trading Academy
February 26, 2007

This week we continue a third "reconnaissance" into the fascinating world of the Exchange Traded Fund (ETF) markets from the eyes of Technical and Trend Analysis. In our previous issue, we took a look at the charts of the Semi Conductors and Emerging Markets as represented by the SMH and EEM Exchange Traded Funds.

In this issue, let's take a look at the XLF, as we focus on the Financial Sector. And then later, we take a "trip" to Brazil as we look into the EWZ, an Exchange Traded Fund that focuses on a variety of top Brazilian Firms:

Chart Notations

The Monthly Chart of the XLF addresses the Long-Term Time Horizon
About the XLF: This Exchange Traded Fund from the Select Sector SPDR Funds is comprised of the top 88 Financial Sector corporations, each of which is a component of the mighty S&P500. With $2.2B in assets, it ranks 41st in size, although it ranks 10th among all ETF's in average daily volume with ~6m shares per day.
Its top 3 holdings: Citigroup, Bank of America and AIG comprise almost 25% of the fund's composition, so this fund's movement will be greatly affected by the price behavior of these three stocks. Among other big stocks within the fund are: JPMorgan Chase, Wells Fargo and Wachovia.
In 2005, the XLF produced a key technical breakout, as it exited away from a Broadening Range Formation (gray), and has since been on a persistent uptrend into new fund highs. As it is literally trading in uncharted territory, finding a target for resistance here is no easy task.
It is important to note however, that the XLF is now almost four years into an uptrend that started in the spring of 2003, and has only produced a correction of 10% on the way up. Although it is entirely possible that the uptrend will continue, the depth of the uptrend without correction constitutes a high level of risk for a downside reaction, particularly now that the market has doubled since its low point in 2002. Let us note that Financial Sector is not a speculative measure, where doubling of values is a common occurrence. An entry point in the low 30's (blue line) near the top of the prior Broadening Range would constitute a more ideal long-side entry point, looking for the resumption of a larger uptrend into the stratosphere later. Often, the best strategy is to just watch.

Chart Notations

The Weekly Chart of the EWZ addresses the Intermediate-to-Long-Term Time Horizon
The EWZ is an ETF from the iShares Family of funds that is designed to track the MSCI Brazil Index. Its holdings consist of a variety of sectors, with the 3 largest being Energy, Industrial Materials and Financial Services. Because of its weighting in Energy (31%) and its largest single holding - PetroBras (11%) - the price of oil plays an important role in the price behavior of this fund, in addition to the course of the Brazilian Stock Market itself.
Recently, this fund has moved into fresh all-time highs, recovering nicely after a severe decline of 35% magnitude in the first half of 2006. At this point the breakout is quite fresh still, although it is exhibiting ideal behavior by sustaining above its prior high point (green). Its tendency to march higher on all trading above the red trendline continues, as the trend is still very much intact above these levels. The trends turn to neutral on sustained trading inside the gray zone, while the bears take over below that, all the way down to the ~$25 mark (gray line). For the time-being, things look quite bullish for Brazil.

Until next week, happy trading!

Fernando now enters his 10th year as an active trader, technical analyst and content contributor to the Active Trading community and a long list of popular financial media. In 1999 he authored the best-selling book Strategies for the Online Day Trader (McGraw-Hill 1999), one of only a handful of books on the topic that have ever reached the top 5 overall best sellers on Amazon.com. In 1998, he was one of the original founding members of the Online Trading Academy team, having developed the original material and coursework. Fernando continues today as Newsletter author, course developer and Instructor here at OTA, where he teaches his highly regarded "Broad Market Analysis" class.

DISCLAIMER:
This newsletter is written for educational purposes only. By no means do any of its contents recommend, advocate or urge the buying, selling or holding of any financial instrument whatsoever. Trading and Investing involves high levels of risk. The author expresses personal opinions and will not assume any responsibility whatsoever for the actions of the reader. The author may or may not have positions in Financial Instruments discussed in this newsletter. Future results can be dramatically different from the opinions expressed herein. Past performance does not guarantee future results.

ABOUT THE WEEKLY REVIEW:
The weekly review heavily focuses on the application of Technical Analysis on the Broad Market Levels. You will rarely see individual Stock Picks on the Weekly Review! It is the author's belief that most Individual Stocks (certainly not all) will follow the overall direction of the Broad Market that surrounds them, as well as the Sectors they comprise. Discussion is focused heavily upon the Major Market & Sector price activity.

Rarely also will you see discussion of the fundamental, macro-economic or political nature in the Weekly Review. By focusing only on the technical, or price & volume aspects of the major measures of the market, Fernando hopes to satisfy any equity trader's needs for a qualified discussion and forecast of the overall direction of equities, whether it be the Short, Intermediate, or Long-Term time horizons. Whether you trade the Index Futures, Index Tracking Stocks or Individual Equity Market Instruments, having an experienced eye on the conditions of the broad market that surrounds you is extremely important!