ETF Analysis and Ranking – Few Uptrends and Lots of Downtrends

ETFs Ranked by WASS

Note that the ETF ranking tables at the top are separate from this commentary. The ranking tables are designed to help with trend-momentum strategies, while the analysis below is based on price structure, setups, chart patterns and pattern breaks. Click here for a detailed article and video explaining the Weighted Average Stochastic Score (WASS) and how it can be used for a rotation strategy.  

Still a Bear Market Environment

Today’s report will focus on the long-term trends for ETFs in the master ETF list (some 200). The vast majority are in downtrends, but 20 or so are bucking the selling pressure or holding up relatively well. I will also talk about trend signals versus setup signals. This report includes a trend table, some scatter plots and charts separating the relatively strong from the relatively weak. Note that I am still in bear market mode and have yet to see enough evidence to change this stance.

Trend Signals versus Setup Signals

Trend following signals, such as Keltner Channel breaks and 200-day SMA crosses, lag because they trigger after a significant price move. The risk-reward ratio does not look good because prices have already moved. Traders taking these signals will experience lots of whipsaws and a few good trends. The idea behind trend following is that a few good trends will pay for the whipsaws (bad trades).

The alternative to taking trend following signals is to wait for a setup to materialize. The risk here is that the setup takes too long to materialize and you miss a good portion of the trend.

A bullish setup materializes when we see a pullback or consolidation within a long-term uptrend. There are varying degrees and timeframes. Some are short, such as flags, small falling wedges and triangles that extend a few weeks. Some are longer, such as larger falling wedges, channels or consolidations that last several weeks or a few months.

A bearish setup is when we see a bounce within a long-term downtrend. These bounces can also be of varying degrees. Some are short, such as flags, small rising wedges and triangles that extend a few weeks. Some are longer, such as larger rising wedges, channels or consolidations that last several weeks or even a few months.

Downtrend Signals Dominate

Where are we now? From a trend-following stand point, there are not many uptrends out there. Of the 200 ETFs in the master ETF list, I count maybe 20 that are in long-term uptrends and only a handful are equity-related. Most are related to bonds, currencies and gold. The table below shows ETFs with active bullish Keltner signals (11), ETFs that are above their 200-day SMAs (23) and ETFs with rising 200-day SMAs (30).

I do not see any bullish setups. Even ETFs in long-term uptrends or on the cusp of long-term trends are quite extended after big advances the last 17 days. Realistically, we have more downtrends and bearish setups right now. The scatter plot below shows the 200 ETFs with the percent above the 200-day SMA on the y-axis and the 50-day Fast Stochastic on the x-axis.

The 50-day Fast Stochastic quantifies the retracement of the current bounce. ETFs with a Fast Stoch above 50 retraced more than 50% of their prior decline. Thus, ETFs in the upper right are above their 200-day SMAs and have the biggest retracements. They are the strongest. The second scatter plot focuses on these ETFs and the table on the left shows them ranked by the percentage above the 200-day SMA.

QQQ Leads, but hits Danger Zone

Now let’s put a picture on these indicators. The Nasdaq 100 ETF (QQQ) remains one of the strongest equity-related ETFs. It is above its 200-day SMA, it’s 200-day SMA is rising and it retraced over 50% of the prior decline. This retracement is quantified by the 50-day Fast Stochastic in the indicator window (value=61.3).

QQQ is also very close to the upper line of the Keltner Channel, but has yet to reverse the bearish signal from early March. At best, the trend evidence is mixed for QQQ: Keltner is still bearish, but price is above the 200-day SMA and the 200-day SMA is rising.

Even though QQQ is leading, it is quite extended after a 20 plus percent advance in 17 days. I also consider this a danger zone because the ETF is in the 50-67% retracement zone and formed an inside day on Wednesday. An inside day shows indecision that can sometimes foreshadow a short-term reversal.  

Other ETFs in this situation include: XLV, IBB, IHF, IHI, XLK, IGV, SMH, KWEB and CQQQ. They remain with bearish Keltner signals, but showed strength on the bounce the last 17 days and some are even above rising 200-day SMAs.

KRE Lags with Shallow Retracement

The Regional Bank ETF (KRE) is in the lower left of the scatter plot and one of the serious laggards. The ETF closed below the 200-day and broke the lower line of the Keltner Channel on February 25th. The 200-day turned down a day earlier as well. KRE led the decline with a 50% scalping from January 2nd to March 23rd. The ETF is in the midst of an oversold bounce, but this bounce failed as a bearish engulfing formed at the 33% retracement mark. The retracement was shallow and the ETF was hit hard the last three days.

Other ETFs in this situation include: IWM, XLF, KBE, KIE, XLI, XAR, RCD and ITB. They are well below their falling 200-day SMAs and the long-term Keltner signals are bearish. In addition, their retracements were extremely weak (18-35 percent). It is hard to have a bull market with such weakness in small-caps, finance, industrials, consumer discretionary and housing.

Bearish Setups More Prevalent

Shorting in general carries more risk (as opposed to long positions). In fact, I am not a big fan of shorting stocks or ETFs. We just saw how violent counter-trend rallies can be and we know that the Fed and government will fight the bear tooth and nail. As noted on Wednesday, there is a pretty classic bearish setup at work in SPY (and in several ETFs). First, the long-term trend is down. Second, SPY retraced just over 50% of the prior decline and RSI(10) moved above 60. RSI moved below 60 for the first signal. The second signal would be a StochRSI move below 20. Plan the trade and plan the trade if considering and prepare for the unexpected, such as further gains to the 200-day SMA (~300).

Gold and Bonds Hold Up

Stocks bottomed on March 23rd and surged over the last 17 days. SPY and QQQ are up over 20% and IWM is up around 18%. The chart below shows performance since March 23rd for these three plus the Corporate Bond ETF (LQD), 20+ Yr Treasury Bond ETF (TLT) and Gold SPDR (GLD). First, notice that IWM (red) peaked last Thursday and did not follow SPY (green) to a new high on Tuesday (closing prices). Small-caps are already started to diverge.

I am more surprised that TLT held up even as SPY surged over 20%. In a normal risk-on move, I would expect TLT to decline significantly when SPY surges over 20%. TLT (brown) basically flat-lined as SPY surged and ticked up on Wednesday. GLD, which is an alternative to everything, continues to hold strong as central banks around the world pump money into the system. Maybe they should change gold’s symbol to FIAT.  

The first chart shows TLT with a bull flag taking shape over the last 1-2 weeks. The second chart shows GLD in the midst of a moonshot. Note that gold hit 1900 in August 2011 and GLD hit 180.

Thanks for tuning in and stay safe!

-Arthur Hill, CMT
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