The market regime is bearish, but SPY and QQQ are still in oversold territory that could give way to a bounce. In addition, we are seeing short-term strength in some of the high-beta ETFs as Treasury yields fell over the last two weeks. Personally, I am not interested in ETFs that are rising from 52-week lows and in clear downtrends. Instead, the focus remains on ETFs that are in uptrends or that held support levels when SPY broke down. Today’s commentary will continue that focus by explaining the importance of benchmark lows. We will then show when a short-term breakout fails and show ways to use the ATR Trailing Stop.
About the ETF Trends, Patterns and Setups Report
This report contains discretionary chart analysis based on my interpretation of the price charts. This is different from the fully systematic approach in the Trend Composite strategy series. In this ETF Trends, Patterns and Setups report, I am looking for leading uptrends and tradable setups within these uptrends. While I use indicators to help define the trend and identify oversold conditions within uptrends, the assessments are mostly based on price action and the price chart (higher highs, higher lows, patterns in play). Sometimes the chart assessment can be at odds with the indicators.
Weekly Scheduling
- Tuesday – 24 May: Market-ETF Report and Signal-Rank Table Update
- Wednesday – 25 May: Market-ETF Video and Market Regime Update
- Thursday – 26 May: Market-ETF Report and Signal-Rank Table Update
Relative Chart Performance with Benchmark Highs and Lows
Chartists can use benchmark highs and lows to compare chart performance and separate the leaders from the laggards. As with all charts and indicators, this analysis can be performed on any timeframe. The first step is to pick a benchmark for the base-case highs and lows. I am going to use the S&P 500 SPDR (SPY).
The first chart shows SPY and the Agribusiness ETF (MOO). First, SPY formed a lower low from January to February, broke its February-March lows in April and formed a lower low from early May to late May. These are the lows I will use when comparing performance. MOO, in contrast to SPY, formed a higher low from January to February, held its February low in early May and formed a higher low from early May to mid May. MOO is showing relative “chart” strength and performing better than SPY.
The next chart shows SPY and the Healthcare SPDR (XLV) with two examples of short-term relative chart strength. Note how SPY formed lower lows in February-March and from early May to mid May (red lines). Meanwhile, XLV formed higher lows in February-March and from early May to mid May. This shows relative strength in XLV because selling pressure was not strong enough to push prices below the prior low.
You can learn more about my chart strategy in this article covering the different timeframes, chart settings, StochClose, RSI and StochRSI.
High Beta ETFs Avoid the May Double
SPY and QQQ did the double dip in May as they forged lower lows from early May to late May. There were several ETFs that are in long-term downtrends, but they held up in the second half of May and avoided the double dip. In fact, quite a few of the high-flyer high-beta ETFs held up in the second half of May. These include IPAY, FINX, PBW, PBD, ICLN, ACES, FAN, TAN, IBB, IHI, URA, LIT, REMX, GAMR, and HERO. Basically, we have fintech, clean energy, biotech, uranium, lithium, strategic metals and gaming. Note that all of these are in long-term downtrends so I would be careful with this short-term siren song.
This lack of selling pressure in the second half of May is a sign of short-term strength, but much more work is needed to reverse their long-term downtrends. If looking for a reason, I would guess that the bounce in the 20+ Yr Treasury Bond ETF (TLT) and fall in the 10-yr Treasury Yield has something to do with short-term strength in these ETFs. The chart below shows TLT bouncing within a bigger downtrend and %TNX correcting within a bigger uptrend. The short-term bounces in the ETFs above could fail should TLT reverse its bounce and resume its downtrend. A break below 115 would be bearish for TLT and a break above 2.9% would be bullish for $TNX.
Active Signals Versus Potential Setups
XLV, XME, MOO
A normal uptrend consists of higher highs and higher lows. An abnormal uptrend would be one that forms higher highs, but returns to the prior lows and holds support. Such is the case for the Healthcare SPDR (XLV). The ETF recorded 52-week highs in September, December and April, which are normal for an uptrend. However, the ETF returned to support from the Sep-Oct lows in late January, late February and mid May (blue zone). This abnormal part means the uptrend is XLV is not consistent and persistent.
XLV also highlights an active signal versus a potential setup. The active signal is the short-term breakout in mid May. Once a signal is active and a position is taken, we then need to determine what would prove this signal wrong. This could be a short-term support break, a potentially bearish pattern or a stop-loss. The blue dotted lines show a short-term rising wedge, which is a potentially bearish continuation pattern. A wedge break would signal a continuation of the sharp decline from mid April to early May. This would negate the current signal (breakout).
The next chart shows the Agribusiness ETF (MOO) with a short-term breakout in mid May for the active signal and a bearish pennant for the potential setup that could negate the breakout. A close below 93 would break the pennant line and call for a re-evaluation.
The next chart shows the Metals & Mining SPDR (XME) with a short-term breakout working and a potentially bearish pennant/wedge. The shape of the pattern is not that important (pennant, wedge, flag, triangle). They are all short-term consolidations that are considered continuation patterns. Pattern breaks would signal a continuation lower. A close below 50 would call for a re-evaluation in XME.
The Momentum Composite aggregates signals in five momentum-type indicators to identify short-term overbought and oversold conditions. This indicator is part of the TIP Indicator Edge Plugin for StockCharts ACP
Upswing Breakouts and the ATR Trailing Stop
DBB, CPER, GLD
The DB Base Metals ETF (DBB), Copper ETF (CPER) and Gold SPDR (GLD) have similar charts over the last few months and similar short-term signals. They all hit new highs in March, fell sharply from mid April to mid May and held long-term support zones. They are in uptrends, but these uptrends have lost some consistency because the May lows were quite deep.
Before looking at the current chart, let’s review the November-December breakouts in DBB. First, note that the broad market environment was bullish then. There was no war in Ukraine and no threat of a global slowdown. DBB hit a new high in October and then fell sharply into early November. After firming for two weeks, the ETF broke short-term resistance on November 22nd and again on December 21st (green arrows). The November lows marked support and a natural level to place a stop-loss. Once prices held and started rising, the ATR Trailing Stop came into play (red line).
You can learn more about ATR Trailing stops in this post,
which includes a video and charting option for everyone.
The situation now is different than late 2021. There is a war in Ukraine, inflation is running rampant, market volatility is above average and the global economy is looking shaky. Such conditions argue for smaller positions and less exposure in general. DBB fell sharply in April-May, but held above the November-December lows and broke short-term resistance last week. This breakout is holding and it is now time to set a level that would prove this breakout wrong. The May low marks first support and this is the natural stop-loss level.
The red line shows the ATR Trailing Stop (2 x ATR(22)), which is 2 ATR(22) values below the highest close since the breakout and will rise further should prices continue to rise. The ATR multiplier (2) controls the tightness of the stop. A smaller multiplier (2) creates a tighter stop and a larger multiplier creates a wider stop (3). There is no right or wrong answer and the choice is largely a personal preference based on your trading strategy. Based on a current stop and a round number buffer, a close below 22 would argue for a re-evaluation. This is around 4% below current prices.
The next charts show CPER and GLD with breakouts and ATR Trailing Stops for reference.
Aerospace & Defense ETFs Testing Support Zones
ITA, PPA
The Aerospace & Defense ETFs (ITA, PPA) surged off support zones and then retested their lows with dips in late May. They both held their May lows and the ATR Trailing Stop for now. The first chart shows PPA with a breakout above 71 on May 17th and the ATR Trailing Stop at 68.37. PPA fell back below 68, but did not close below the ATR Trailing Stop and bounced the last few days. I am an end-of-day trader and prefer to take signals on closing prices.
You can learn more about exit strategies in this post,
which includes a video and charting options for everyone.
Latin America ETF and Trend-Following Strategy
The stop-loss preferences depend on your trading timeframe, risk tolerance and other personal preferences. A short-term swing trader would likely have a tighter stop than a long-term trend follower. The short-term breakouts shown above are more like swing trades and this is why the stops are relatively tight. For trend-following strategies, I typically exit when the Trend Composite turns negative or a wider ATR Trailing Stop is triggered. The example below shows the Latin America 40 ETF (ILF) with the Trend Composite turning bullish on March 3rd and a 6 ATR(22) trailing stop, which triggered on April 25th.
The next chart shows the Latin America 40 ETF (ILF) with the Trend Composite turning positive right as the ETF broke out on May 16th. The tight stop at 26.43 uses 2 for the multiplier and the wider stop uses 6. This wide stop may seem quite far away, but keep in mind that an exit is based on the Trend Composite turning negative or the wide ATR Trailing Stop triggering.
The Trend Composite aggregates trend signals in five trend-following indicators: Bollinger Bands, Keltner Channels, Commodity Channel Index, StochClose and Moving Average Trend. This indicator and ten others are part of the TIP Indicator Edge Plugin for StockCharts ACP. Click here for more details.
Previous Commentary and Video
Wednesday Market and ETF Video (here)
Market Regime Update with Breadth Model and Yield Spreads (here)
Topics Covered in Tuesday’s Report (here)
- SPY and QQQ are Still Near Oversold Levels
- Energy and Agriculture Lead Ranking Table
- New High and Leading XLE (plus $WTIC)
- Short-term Pullback/Correction after New High PSCE, XES, FCG XOP
- Short-term Pullback and Breakout in May DBA, CANE, WEAT
- Short-term Pullback/Correction after New High XLU, DVY
- Uptrends with Deep Pullbacks DBB, RTM, XME, SLX
- Did not Break January-March Lows XLV, XLB, MOO
- Held December-January Lows and Short-term Breakout GLD
- Bounce off Range Support CPER
- Held January Low, but No Short-term Breakout PALL
- Tech-Related ETFs Show Short-term Relative Strength
Note that Adam Rozencwajg was featured on the Global Macro series at Top Traders Unplugged, which is one of my favorite podcasts. This episode dives into ESG policies, climate-green versus nature-green energy, uranium, copper and more.