Video and Report Headlines
Broad Market Analysis
- SPY and QQQ in Correction Mode
- Small and Mid-caps Underperforming
- Yield Spreads Did not Turn Up
- The Leaders Take a Hit
- A Few ETFs Bucking the Trend
Chart Analysis, Setups and Trading Ideas
- Utes and Healthcare Providers Hold Up, BUT …
- O’Reilly Automotive (ORLY)
- Paccar (PCAR)
- Regeneron (REGN)
- Vertex Pharmaceuticals (VRTX)
- Textron (TXT)
The next Chart Trader will be posted on Thursday, September 28th.
SPY and QQQ broke down last week and the medium-term trends are down. That’s the negative news. On the positive side, the long-term trends are still up and both are well above their 200-day SMAs. This suggests that the current decline is a correction within the long-term uptrend. Small-caps and mid-caps, however, are not in long-term uptrends. They are in long-term trading ranges and medium-term downtrends. The S&P 500 EW ETF (RSP) also broke its 200-day SMA and several key ETFs broke their August lows. These include semiconductors (SOXX), housing (ITB), retail (XRT) and regional banks (KRE). Most stocks and stock-based ETFs are likely to remain under pressure as long as SPY and QQQ are in corrective mode. A few will buck the selling pressure, but risk remains above average for stocks right now. Trade accordingly.
SPY and QQQ in Correction Mode
SPY is in a medium-term downtrend and a long-term uptrend. Long-term, the ETF is still above the rising 200-day SMA. Medium-term, SPY forged a lower high from July to August and a lower low from August to September. Because the long-term trend is up, this medium-term downtrend is a correction after the prior advances. SPY was up 18% from March to July and up 28% from October to July.
As far as downside targets are concerned, I am marking a support zone in the 405-420 area. The gray shading marks a support zone based on the February high and April-May lows. A 50% retracement of the March-July advance would extend to around 420. A 50% retracement of the October-July advance would extend to around 408. And finally, the rising 200-day SMA comes into play around 418. Thus, 420 is the first target for this correction.
The next chart shows QQQ breaking flag support last week and falling to its August lows. The medium-term trend is also down, but the long-term trend is still up. QQQ is above the rising 200-day SMA. Applying the same logic, the 323-337 area marks the downside target for this correction. A 50% retracement of the March-July advance would extend to the 337 area. A 50% retracement of the December-July advance would extend to the 323 area. The rising 200-day SMA resides in the 329 area.
Small and Mid-caps Underperforming
The S&P 500 EW ETF (RSP) comprises the same stocks as the S&P 500 SPDR (SPY), but RSP is an equal weight version. SPY is the large-cap version that is dominated by a few dozen stocks. RSP accounts for the other 450+ stocks in SPY and shows us how the average stock is performing. First, the top window shows RSP peaking at the February high in July. Second, RSP is already below its 200-day SMA and much weaker than SPY. Third, the bottom window shows the RSP:SPY ratio hitting a new low in September. The average stock in the S&P 500 has been underperforming large-cap stocks since January 2023, which is when the RSP:SPY ratio peaked. Small-caps and mid-caps are not the place to be.
Yield Spreads Did not Turn Up
Stocks fell sharply last week and SPY is around 6% below its July high. Even so, the BBB yield spread remained narrow and did not widen. Keep in mind that there are two components to the yield spread. The 10-yr Treasury Yield is at 4.54% and the BBB yield is at 6.17%. The spread is the difference between the two (6.17 – 4.45 = 1.63). This difference does not jibe with the chart number (1.48) because the chart shows the ICE BofA BBB US Corporate Index Option-Adjusted Spread. Yes, there is some option-adjustment going on. In any case, the BBB spread fell from mid March to July and then flattened. It has yet to turn up (widen) and there are no signs of stress in the credit markets. A widening above 1.6 would show stress in the credit markets and this would be negative for stocks.
The Leaders Take a Hit
The S&P 500 High Quality ETF (SPHQ) was leading the market with a new high on September 1st, but it too succumbed to selling pressure and broke support. Overall, the pattern looks like a double top with the mid August low marking support. The ETF closed below support on Thursday and Friday, but got an oversold bounce on Monday to close back above. Despite Monday’s recovery, I think the pattern remains valid and the downside target is in the 47-48 area. Weakness in “high quality” stocks shows that selling pressure is expanding to the former leaders. This is negative for SPY and the broader market.
A Few ETFs Bucking the Trend
SPY is down 4.20% the last 16 days (September) and down 5.4% the last 40 days (since the July high). Most stocks and stock-related ETFs are also down over this period, but a few are holding up. Here in September, the following groups are showing gains:
- Uranium ETF (URA) +16.66%
- Dry Bulk Shipping ETF (BDRY) +14.31%
- Alternative Harvest ETF (MJ) +8.52%
- US Oil Fund (USO) +7.10%
- Oil & Gas Equipment & Services ETF (XES) +3.67%
- Insurance ETF (KIE) +2.30%
- Healthcare Providers ETF (IHF) +1.93%
- Palladium ETF (PALL) +.43%
- Utilities SPDR (XLU) +.38%
Chart Analysis, Setups and Trading Ideas
Utes and Healthcare Providers Hold Up, BUT ...
The Utilities SPDR (XLU) and Healthcare Providers ETF (IHF) are holding up in September, but they are not in uptrends and both are below their falling 200-day SMAs. Both represent defensive groups that could hold up better during a correction or market decline. The first chart shows XLU breaking support in August and falling sharply at the beginning of September. The ETF then rebounded with a sharp advance above short-term resistance. XLU fell with the rest of the market last week, but remains above its early September low. In fact, last week’s decline retraced 67% of the September surge. This retracement could be a short-term reversal zone and a break above 64 would be short-term bullish.
The next chart shows IHF with a sharp decline into early September and a short-term breakout with a surge the last four days. IHF held above its March-May lows in September, which means we have a higher low working. The short-term breakout reverses the downswing and the re-evaluation level is set at 246.
O'Reilly Automotive (ORLY)
ORLY is correcting within an uptrend. The stock is in an uptrend because it hit a 52-week high in July and remains well above the rising 200-day SMA. After hitting this high, ORLY corrected with a triangle consolidation the last few months. A consolidation after a new high is typically a continuation pattern and a breakout at 960 would be bullish. Such a move would signal a continuation of the bigger uptrend and target a move towards the 1000 area.
Paccar (PCAR)
PCAR is breaking out of a bullish continuation pattern. First, the stock is in an uptrend overall. It hit a 52-week high in July and remains well above the rising 200-day SMA. The stock corrected with a triangle into September and broke out with a move above 86 last week Monday (18-Sept). PCAR fell back after the breakout, but rebounded the last two days and the cup is still half full. I view this as a bullish breakout that signals a continuation of the bigger uptrend. A close below 82 would call for a re-evaluation.
Regeneron (REGN)
The Biotech SPDR (XBI) and Biotech ETF (IBB) sank to new lows for the year, but Regeneron (REGN) held up in September with a bullish continuation pattern. First, the stock surged to a 52-week high in August. It is in an uptrend and well above the rising 200-day SMA. The stock formed a pennant consolidation the last few weeks. A consolidation after a sharp advance is typically a bullish continuation pattern. As such, a breakout at 840 would signal a continuation higher and lead to new highs. I would then set a re-evaluation level at 818.
Vertex Pharmaceuticals (VRTX)
The Healthcare SPDR (XLV) broke below its August lows here in September and did not hold up. VRTX, in contrast, remains above its August lows and is holding up better. Overall, the stock is in a long-term uptrend with a 52-week high in July. VRT is also well above the rising 200-day SMA. A triangle formed from July to September and the stock broke out with a surge last Tuesday. VRTX fell back with the rest of the market over the last few days, but the overall pattern and bullish setup remain. I would re-evaluate on a close below the July-August low (340).
Textron (TXT)
Textron led the market this summer with a 28% surge to new highs in early August. The stock was overbought after this surge and digested these gains with a triangle consolidation. A consolidation after a sharp advance is typically a bullish continuation pattern. While the market fell apart last week, TXT gapped above triangle resistance. A breakout is working and this signals a continuation higher. The gap zone (green shading) marks first support. I will set a re-evaluation at 75.
