Stocks fell sharply the last three days with QQQ and SPY leading the way as they fell 4.12% and 3.32%, respectively. Small-caps held up better as IWM fell just 1.4%. Nevertheless, IWM is trading near its summer lows and the weakest of the three over the past month and since March.
Weakness in small-caps and mid-caps over the last few days was enough to trip the Composite Breadth Model and turn it bearish again (see Tuesday’s Market Regime update). This is a medium to long term issue. At best, a bearish Market Regime means stock/ETF picking just got a lot harder (as if it was not already a challenge). At worst, it means we will see a broad market correction or decline. Short-term, stocks are a bit oversold after the three day plunge and this could give way to a bounce.
December Scheduling
Note that I usually take off between Christmas and New Year, but will make time on Wednesday, December 29th for a commentary/update. The normal commentary schedule will resume on Monday, January 3rd. The holiday scheduling will be as follows:
- Tuesday 21-Dec: Market Regime and ETF Commentary
- Wednesday 22-Dec: ETF Commentary
- Thursday 23-Dec: Weekly Video
- Friday 24-Dec: Christmas Eve (day off)
- Saturday 25-Dec: Christmas Day (day off)
- Wednesday 29-Dec: ETF/Market Commentary
The first chart shows SPY surging with strong Advance-Decline Percent on December 2nd and then failing to hold this surge with a sharp decline the last three days (yellow shading). Based on intraday highs and lows, the ETF experienced three swings greater than four percent in the last five weeks. This shows above average volatility and this means above average risk.
SPY is back near its early December low and this “was” considered a reversal zone in late November. The strong reversal off this zone in early December should have held. It did not and SPY is back testing this zone. I view this re-test as a sign of weakness because the first attempt failed and the decline over the last three days was rather sharp. Having said that, I cannot ignore the fact that SPY and the market are short-term oversold and some ETFs are near support. This could give way to a short-term oversold bounce, but damage has already been done to the Composite Breadth Model.
You can learn more about my chart strategy in this article covering the different timeframes, chart settings, StochClose, RSI and StochRSI.
QQQ is in a similar situation as SPY with one difference. QQQ is testing the early December low, but the ETF formed a lower high from mid November to mid December, and again from December 9th to 15th. This is short-term stuff, but it shows QQQ underperforming in December. QQQ was the leader for a long time and is starting to show some weakness. We already saw the breakdown in high-beta and high-growth stocks/ETFs. QQQ used to be immune, but even the best and biggest correct at some point.
SPY is back near its early December low and this “was” considered a reversal zone in late November. The strong reversal off this zone in early December should have held. It did not and SPY is back testing this zone. I view this re-test as a sign of weakness because the first attempt failed and the decline over the last three days was rather sharp. Having said that, I cannot ignore the fact that SPY and the market are short-term oversold and some ETFs are near support. This could give way to a short-term oversold bounce, but damage has already been done to the Composite Breadth Model.
When looking for trades and trends, the first thing I look for is a consistent and persistent uptrend. Such uptrends forge higher highs and higher lows on a regular basis. I am also looking for an identifiable ebb and flow to identify tradable pullbacks or consolidations. SPY and QQQ still have consistent and persistent uptrends, but the recent uptick in volatility is a concern, as is the bearish turn in the Composite Breadth Model.
The Russell 2000 ETF (IWM) and many other charts do not have consistent and persistent uptrends, nor do they sport robust pullbacks or bullish continuation patterns. ETFs in this trend-less category include XLI, IFRA, XRT, ITA and SLX. IWM may be short-term oversold and at support, but it is back near its March 2020 lows and has gone nowhere for a long time. There is no clear trend on this chart, which makes it a pass (move on to the next chart).
You can learn more about exit strategies in this post,
which includes a video and charting options for everyone.
The Cybersecurity ETF (CIBR) remains in an uptrend overall, even after it fell some 12% from mid November to early December. CIBR shows some relative strength among the tech-related ETFs because it held above its October low and the mid December low is above the early December low. CIBR formed an inside day on Friday-Monday and a breakout at 52 would be bullish. This would reverse the short-term downtrend and argue for a resumption of the bigger uptrend.
With QQQ starting to underperform and tech-related ETFs feeling the heat overall, I must also consider the bearish alternative. In other words, what would it take to prove my bullish thesis wrong (otherwise). The blue lines in December mark the bearish alternative. CIBR fell sharply and then formed a pennant consolidation. This could be a short-term rest or bearish continuation pattern. A move below 49 would break pennant support and signal a continuation lower.
Healthcare is still one of the leading groups with new highs recently in the Healthcare SPDR (XLV) and the Healthcare Providers ETF (IHF). The Medical Devices ETF (IHI) is not as strong as these two, but still sports a big bullish continuation pattern. IHI surged some 22% and then retraced around half with a correction the last two to three months (blue dashed lines). This looks like a consolidation designed to digest the big gain and a breakout at 65 would be bullish. This would signal an end to the consolidation and a resumption of the bigger uptrend.
