ETF Grouping and Ranking Report – Outsized Declines, Retracement Targets, Patience During Corrections, Gold and Bonds Balk

Stocks were hit hard from Friday to Tuesday with the S&P 500 SPDR, Nasdaq 100 ETF and others recording outsized declines. Today we start with these outsized declines and show what they entail going forward. Stocks were already extended and these sharp declines signal the start of a corrective period. At this point, I will treat any weakness in SPY and QQQ as a correction within a bigger uptrend. At least as long as the price charts are long-term bullish and the breadth models remain bullish. It is still early days for the correction and it may take time to digest the gains from March to September. Thus, a little patience may be required to wait for medium-term bullish patterns or setups to emerge.

An Outsized Move for SPY

For the fifth time since early 2018, the SPY fell over 5% in three days. The last four outsized declines from new highs led to corrective periods (February 2018 and August 2019) or sharp declines (October 2018 and February 2020). The corrective periods were marked by eight to twelve weeks of sideways price action and then breakouts (blue lines). The outsize decline in October 2019 led to the December 2019 low and the outsized decline in February foreshadowed the March crash.

Correction Target for SPY

It is hard to predict the path of a correction, but I believe a correction is underway and this will weigh on most stock-related ETFs. In other words, most stock-related ETFs will weaken should SPY pull back to its 200-day SMA. The bar chart for SPY shows the base case for a correction. The July breakout zone, the 33% retracement line and the rising 200-day converge in the 310 area to mark support going forward. A normal correction should find support in this area. I am, however, not sure we are in a normal market.

QQQ Retracement Target

The charts for QQQ, the tech-related ETFs and some of the other leaders show the minimum retracements (33%) on the charts. To keep things uniform, I am basing these retracements off the March-September advance. The advances from March to September were extraordinary and a correction at this stage would actually be normal, and healthy. As noted on Friday, predicting correction targets is subjective and the market has a mind of its own. I will keep an eye on these targets while waiting for a bullish setup or pattern to emerge.

RSI(14) dipped into oversold territory (30-50) for QQQ and many ETFs. Technically, this opens the door for a mean-reversion bounce and stocks bounced on Wednesday. This setup, however, is quite short-term in nature and a bounce is normal after an outsized decline (-10% in three days). But a 10% decline in three days is not normal. At the very least, it reflects a serious uptick in volatility (risk). At worst, it signals a bearish reversal or the start of a corrective period. We can expect success when playing mean-reversion bounces in steady uptrends. The uptrend is not steady anymore and this will decrease the success rate for mean-reversion bounces.

Let the Market Come to You

The breadth models turned bearish in late February and avoided the crash, but did not turn bullish until June-July and missed most of the rebound. It is tough to watch a sharp advance when not participating, but it is also important to not force a shot. Don’t force a 3-point shot when Anthony Davis is in your face (unless you are Stephen Curry). If the market is not too your liking, wait for the setup. The chart shows ITB racing higher and then forming a bullish pennant in June. It was tough to wait, but a setup ultimately materialized and ITB gained 20+ percent with the breakout.

We are now back in the waiting game for ITB and most stock-related ETFs. The ETF became quite extended in late August and corrected over the last two weeks. Note that ITB and XHB are lagging short-term because they peaked ahead of SPY. There is a short-term setup in the works now as RSI dipped in the 40-50 zone. However, most stock-related ETFs will follow SPY and a broad market correction could weigh. This is why I would be content to wait for a medium-term bullish pattern or setup to emerge (pennant, flag, wedge). The 33% retracement line, triangle breakout and 200-day SMA converge in the mid 40s for possible support.

Gold and Bonds Balk at Stock Decline

SPY fell 6.8% from Friday to Tuesday, but the Gold SPDR (GLD) and 20+ Yr Treasury Bond ETF (TLT) did not pick up the slack and edged lower these three days. One would normally expect gold and bonds to pick up the slack, but the markets are anything but normal after all this Fed intervention. GLD remains with a bullish pennant in the works. TLT, on the other hand, broke out of a falling wedge and retracted the breakout with a sharp decline on Friday. While intermarket relationships are “interesting”, I am hesitant to use one asset to time decisions on another asset. Instead, we need to view their charts independently and based decisions on the price action for the underlying asset. Analyze the GLD chart for GLD, the TLT chart for TLT and the SPY chart for SPY.

Scatter Plot and Ranking Table

The scatter plot became more “scattered” with the uptick in volatility and downtick in many of the leading ETFs. There is still a big group above 80 (strong uptrends), but the RSI values are more spread out. ETFs to the left (RSI below 50) are mildly oversold (AGG, LQD, XME) and ETFs to the right are not oversold anymore (GLD, SLV, GDX). Bonds and biotechs, strange bedfellows, occupy the middle ground as they are mildly oversold and undergoing some sort of correction (StochClose < 80).

See this article to learn more about the StochClose indicator.

The tech-related ETFs dropped out of the top 20 on the ranking table because they experienced sharp corrections and sizable declines in their StochClose values (>10). The top ten ETFs represent a rather diverse group: Preferred Stocks, Corporate Bonds, Materials, Industrials, Emerging Markets, Home Builders, Retail and the S&P 500 EW ETF.

Pattern and Trend Groups

Here are the current grouping for the core ETF ChartList. All charts are updated and you can view them in the ETF ChartBook, which is organized as follows:

1) New High early Sept, Shallow Pullback, Advance since July Breakout


2) New High in early Sept, Pullback, Testing mid August Breakout Zone


3) New High is early Sept, Pullback, Testing Early August Breakout Zone


4) New High in early Sept, Pullback, Testing Support from August Lows


5) New High Early Sept, Pullback, Above Early July Breakout Zone


6) New High in late August, Shallow Pullback


7) New High in early August, Pullback and Bullish Pennant/Triangle


8) New High in early August, Falling Wedge Breakouts under Threat


9) New High in mid July, Falling Channels (longer pullbacks)


10) Above 200-day SMA Bullish Flags (shorter pullbacks)


11) Exceeded June High, Testing Small Flag Breakout


12) Exceeded June High, Above 200-day


13) Exceeded June High, Failed Flag, Lower High from Aug to Sep


14) Did not Exceed June High, late July Breakout, No Follow Through


15) Below June High, Lower Highs in July and Aug*, Testing Support


16) Below June High, Lower Highs in July and August, Broke Support


17) Below 200-day, Broke Rising Channel/Wedge Support in late August


Thanks for tuning in and have a great day!

-Arthur Hill, CMT
Choose a Strategy, Develop a Plan and Follow a Process

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