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Opportunies in ETF's - Mike Swanson (10/24/06)

Submitted by Mike Swanson on Tue, 2006-10-24 08:06.


I use TC2007 to discover new stocks and sectors to buy and to keep track of what I own. Over the weekend I did a scan of all of the exchange traded funds to try to find at least one that looked like it was going to make a big leg up. Using this software it only takes a few minutes to flip through hundreds of charts. The ETF that stuck out the most was ILF - The S&P 500 Latin America 40 Index Fund, comprised of 40 ADR's from countries below Mexico. With a little more research I found that all of these countries have been going through huge bull markets over the past few years and have sported high rates of GDP growth.


The ILF ETF had a large pullback in the spring and has since rallied all of the way back up to its 200-day bollinger band. It has been consolidating below it for the past week and appears to be poised to break out of it. This is important, because the 200-day bollinger band usually acts as an important support and resistance level. If a stock or sector breaks out of it after consolidating it usually makes a large move up when it is already in a bull market. The DOW in fact did this during the summer, while the Nasdaq is currently trading below the 200-day bollinger band and will likely top out on it. ILF looks like it is going to breakout and rally for six months or so. We saw it make similar breakout in the Fall of 2004. Short term-support on it is at 150 and resistance is at 155.50.


Gold stocks rallied up to their 200-day bollinger band in the spring and pulled back to bottom off of their lower band. They have begun to rally and you can't get more bullish than yesterday's action as gold fell over $10 while the gold stocks gapped down and rallied into the green. That's pretty convincing evidence that they indeed are in a new uptrend. Current resistance on the XAU is in the 140-145 area. We should reach it sometime next month.

After that the XAU is going to have to rally up to its 200-day bollinger band and then breakout of that to begin another leg up of its bull market. Six months from now it will have to be in the position that ILF is in right now. ILF fell off of its bollinger band, bottomed, bounced up, consolidated, and then rallied right back up to its upper band. That's what the XAU should do over the next
several months. This is exactly what it did in 2005.

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