The broad market environment for stocks was more bearish than bullish early last week and became even more bearish after the sharp decline on Thursday-Friday. Downside participation broadened as many of the market leaders were hit hard. We are talking about the Metals & Mining SPDR, the Copper Miners ETF, the Agribusiness ETF and the Oil & Gas Equipment & Services ETF. These ETFs are still in uptrends, but selling pressure on Thursday-Friday could be a shot across the bow because it means there could be fewer leaders and uptrends in the future. The bears still have the edge in the stock market and stock-related ETFs could become even more vulnerable. Some ETFs are experiencing hard pullbacks within uptrends, but the Trend Composite turned negative for others (RSP, REMX). The Market Regime page was also updated (link above).
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.
Sad News and Scheduling
The report schedule for the next two weeks will be a bit different because I am attending a family funeral. My mother (85) had a sudden heart attack on Easter Sunday evening and passed away on the following Monday. Fortunately, we had a family zoom on Easter morning and saw her in when she was good spirits. I travelled to the US on Sunday and was able to work on the plane, which is why today’s report is coming early (Sunday afternoon). The next reports will be on Wednesday and Thursday late evening (US evening) this week.
The Benefits of a Systematic Approach
Needless to say, it has been a roller coaster of emotions this past week and will continue as we head into the funeral on Saturday. This example is a bit extreme, but it highlights the need for a systematic approach to chart analysis, trading and investing. We need to remove as much emotion as possible when analyzing charts and making trading/investing decisions. A simple checklist with a bullish or bearish bias for each item can help immensely. We are not looking for degrees of bullish or bearish. If the indicator is 51% bearish and 49% bullish, then it is just bearish. Adding nuance to the interpretation just increases subjectivity, and this is a deep rabbit whole. Best of all, the checklist pretty much makes the decision for us.
- Composite Breadth Model: Bearish since 11 April
- Percent of Stocks above 200-day SMA: Bearish
- BBB Yields Spreads: Elevated and rising (bearish)
- S&P 500 5/200-day Cross: Bearish
- QQQ Leading or Lagging: Lagging (bearish)
- Offensive Groups Leading or Lagging: Lagging (bearish)
The broad market environment is clearly more bearish than bullish right now and this will influence our chart analysis for stock-related ETFs because there is a bearish headwind in the stock market. This will affect most stock-related ETFs because the broad market environment is the single most important factor at work. My preference is for ETFs that are not stock-related and not highly correlated to the S&P 500.
We can also apply a basic checklist to filter out individual charts:
- Uptrend or Downtrend (price chart)
- Trend Composite Positive or Negative
- Leading or Lagging (StochClose value)
While sometimes we all get distracted with a potential bottom, I should really only focus on ETFs that are in uptrends and that are leading in some way, shape or form. Sure, there is some nuance involved because sometimes we see choppy uptrends and whipsaws in the Trend Composite. The question of leading or lagging can also depend on timeframe. With a simple checklist we can quickly narrow our focus list to ETFs that are in some sort of uptrend and leading.
Having a plan/strategy and implementing that plan/strategy is the most important aspect of trading and investing. Yes, the plan/strategy is important, but the implementation is just as important. As Mike Tyson says: everybody has a plan until they get punched in the face. The market is going to punch us in the face periodically and we need to have a process for dealing with that.
The weight of the evidence is bearish for stocks and the leaders were also hit hard on Thursday and Friday. ETFs based on stocks are at risk right now, even the defensive groups (XLU, XLP, PBJ). My strategy is to trade uptrends and bullish setups when the weight of the evidence for stocks is bullish. The weight of the evidence is bearish so I should be ignoring most, if not all, stock related ETFs. As noted at the beginning, there is a dark cloud hanging over the stock market right now and stocks in general are vulnerable.
Selling Pressure Broadens within the Stock Market
Selling pressure broadened within the stock market as some of the leading ETFs and groups were hit especially hard the last two days (XME -11.28%, COPX -11.08%, GDX -9.59%, XES -7.90%). These are the commodity-related ETFs that were leading. The percentage of stocks above the 200-day SMA also took a hit. Less than 30% of Nasdaq 100 stocks are above their 200-day SMAs. $NDX stocks account for some 40% market cap of the S&P 500 and this is weighing on the broader market too. Moving down, just 36% of mid-caps are above their 200-day SMAs and just 32% of small-caps. These are not bull market numbers and these indicators have been bearish since late January (red shading).
There was also an expansion of new lows as the High-Low Percent indicators dipped to their lowest levels since mid March. The next chart shows High-Low Percent for the S&P 500, Nasdaq 100, S&P MidCap 400 and S&P SmallCap 600. High-Low Percent is the percentage of stocks making new highs less the percentage making new lows. The S&P 500 was the only one of the four that got back above +10% in late March and April. We can thank stocks related to energy, utilities and consumer staples (defensive). Nasdaq 100 High-Low Percent never got back above +10% and dipped to -14.71% as new lows expanded last week. Mid-cap High-Low Percent has struggled the entire year and small-cap High-Low Percent is by far the weakest of the four. Again, these are not bull market numbers.
SPY with Lower Lows and Lower Highs this Year
The long-term trend remains down for SPY. The ETF broke down in January, formed a lower high in late March as it failed at the blue reversal zone and fell some 7.7% here in April. The red dotted lines show lower lows and lower highs here in 2022 to define the downtrend. The Trend Composite experienced a whipsaw in late March – early April, but turned negative again on April 18th. Furthermore, the bullish ROC Shock was negated as Normalized ROC exceeded -3 (-3.25). This means the current decline is 3.25 ATR(22) values and this makes it an outsized decline, which is more bearish than bullish.
The bullish ROC Shock at the end of March threw the market a bit of a curve ball because it was an outsized advance and had the potential to reverse the downtrend. There was also a short-term bullish setup with a 50% retracement and pullback to the breakout zone with a falling flag. This flag breakout attempt failed miserably as SPY fell hard on Thursday and broke the flag low on Friday. This is the third downswing greater than 7% this year. The chart shows the percentage change for the big upswings and downswings this year. Volatility is through the roof and this means risk is well above average. High volatility combined with bear market conditions is not a good recipe for stocks.
QQQ Fails to Break Out
QQQ remains in a downtrend and is lagging the broader market . QQQ broke down in January and extended lower into March. The ETF then surged 16.6% in 11 days at the end of March, but met resistance in the blue zone and fell 12.34% the last 17 days. Thus, we have lower lows and lower highs from January to March and the dotted red lines define the downtrend. The Trend Composite turned negative on January 20th and remains negative.
QQQ also teased the bulls with an outsized advance in March as Normalized ROC exceeded 3 (green bars). This outside advance has been countered with an outsized decline as QQQ fell 3.92 ATR(22) values. I am not a big fan of targets, but the lower line of the red falling channel extends to the 305 area.
Weight of the Sector/Group Evidence is Bearish
The EW Technology ETF (RYT), EW Industrials ETF (RGI), EW Finance ETF (RYF) and EW Consumer Discretionary ETF (RCD) also formed lower lows and lower highs in 2022. The chart below shows these four in clear downtrends this year and this is not a bullish configuration because these are offensive sectors. I am showing the equal-weight versions to neutralize market cap and show performance for the average stock in the sector. Tech stocks represent the high beta trade and risk appetite in the market. Industrial stocks represent the backbone of the economy (industrial production). Consumer Discretionary represents retail and housing, two very important parts of the spending equation. Finance represents banks, lending institutions and insurance providers.
This is not the market environment for taking big risk or being fully invested in stock-related ETFs. The Composite Breadth Model is bearish, the S&P 500 is below its 200-day, the majority of stocks are below the 200-day SMAs and the wrong groups are up/down.
Defensive ETFs Take a Hit
I am going to highlight some of the stronger ETFs in the next few sections, but keep in mind that stocks are highly correlated for the most part and the broad market environment is bearish. Despite sharp declines last Thursday-Friday, the Healthcare SPDR (XLV), Food & Beverage ETF (PBJ) and Utilities SPDR (XLU) are still the leaders within the market and still in uptrends. The first chart shows PBJ hitting a new high after a 14% advance and getting hit. The 50% retracement area and breakout mark the first zone to watch on the pullback.
Aerospace & Defense ETFs Take Big Hits
The Aerospace & Defense ETFs (ITA, PPA, XAR) represent a theme going forward: more defense spending in the US, Europe, Australia and elsewhere in the Western world. I still think this is a valid theme going forward, but these are still ETFs composed of stocks and could be vulnerable. ITA and PPA are in uptrends with big breakouts in March and positive Trend Composites. They broke out of bull flags in mid April and these breakouts failed. Even so, the bigger trends are still up. The first chart shows PPA with a failed breakout and sharp decline that pushed the Momentum Composite to oversold (-3). There is also a support zone in the 74-75 area from broken resistance. This may be one to keep on the radar.
The next chart shows ITA with a possible support zone in the 104-108 area. This zone is bigger because ITA is more volatile. ITA is not quite oversold per the Momentum Composite, but one we may want to keep on our radar. Note that oversold conditions are not the setup or the signal. Oversold conditions simply serve as an alert to be on guard for a bullish setup or short-term reversal. Put the ETF on the radar.
The Trend Composite aggregates trend signals in five trend-following indicators: 5-day ROC of 125-day SMA, Bollinger Bands (125,1), Keltner Channels (125,2,125), CCI (125) based on Closing Prices and StochClose (125, 5). You can learn more about the Trend Composite here.
The Trend Composite is part of the TIP Indicator Edge Plugin for StockCharts ACP
Oil Remains with Upswing in Bullish Consolidation
Oil earned its stripes as an uncorrelated asset by firming on Thursday and edging higher on Friday. There is no change in the chart analysis. The long-term trend is up and the larger wedge is viewed as a consolidation within this uptrend. It is a bullish continuation pattern and a breakout at 110 would open the door to new highs. The swing within the wedge is up as the ETF broke out with a surge on April 12th.
Energy Related ETFs Act Like Stocks
Even though oil held up on Thursday and Friday, the Energy SPDR (XLE) and its cousins were hit with selling pressure and fell sharply. The chart below shows XLE hitting a new high in April and falling sharply the last two days. I do not see a setup and XLE is not yet oversold (Momentum Composite is at -1). Energy is one of the themes going forward as the West works to reduce its reliance on Russian energy. At this stage, the trend is up and XLE is still a leader, but I do not see a short-term bullish setup. The same for the other ETFs.
MOO, XLB and XME Act More Like Stocks
Admittedly, some ETFs are less stock-oriented than others. XES is tied to oil, LIT is tied to lithium, COPX is tied to copper and GDX is tied to gold. The Agribusiness ETF (MOO), Materials SPDR (XLB) and Metals & Mining SPDR (XME) are probably less tied to a commodity and more stock-oriented. These three fell sharply on Thursday-Friday and broke their early-April lows. All three are still in long-term uptrends, but may be influenced more by the broad market environment than ETFs tied to oil, copper and gold. All three are short-term oversold just based on the percentage decline over the last two days, but the Momentum Composite has yet to become oversold. The charts show potential support zones to watch going forward.
Base Metals Hold Up, but Copper Gets Hit
The DB Base Metals ETF (DBB) and Copper ETF (CPER) are real commodity-based ETFs because there are no stocks in these ETFs. DBB is holding up well and remains within a bullish consolidation, but CPER got hit hard within its choppy uptrend. The first chart shows DBB with a pennant consolidation after a sharp advance. Again, a consolidation after a sharp move is a continuation pattern and a breakout would open the door to new highs. A break below the pennant low would not derail the overall uptrend and likely lead to the next mean-reversion setup when DBB becomes oversold.
CPER actually has a bullish setup. First, it is not a stock-related ETF so is not disqualified because of the bearish environment. Second, it is in a clear uptrend. Third, it is oversold as the Momentum Composite hit -3. I do not see a short-term setup on the price chart, such as a bull flag and it is difficult to mark support. CPER, however, is prone to short and sharp pullbacks within an uptrend and this could be another one. Note that an exit would likely have to be based on the Trend Composite turning negative.
DB Agriculture ETF and Related ETFs in Uptrends
The DB Agriculture ETF (DBA) is also an ETF that is purely commodity-based. DBA fell back the last four days, but remains in an uptrend overall and a leader. The triangle was the last short-term bullish setup and the breakout triggered on April 8. Price is back near the breakout level now.
Gold Falls Back and GDX Plunges
The Gold SPDR (GLD) fell sharply on Tuesday and continued lower the next three days. Overall, GLD fell 2.34% over the last four days, the Gold Miners ETF (GDX) fell 9.62% and the Silver ETF (SLV) fell 6.54%. GDX was down four times as much as GLD and SLV was down almost three times as much. There is a lesson here. Choose GLD for less volatility, choose SLV to spike the punch and choose GDX for the wild ride. GDX and SLV are highly correlated to GLD and I find it easier to focus solely on GLD for signals and setups. GDX or SLV can then be used as the tradable instruments if you want more excitement.
GLD remains in an uptrend and bullish. The ETF broke major resistance levels with a 16% surge to new highs and then fell back to the breakout zone with a falling wedge (and normal retracement). GLD broke out of this wedge and then fell back sharply the last four days. I do not view this pullback as a major failure and the trend remains up. Thu, it is considered a pullback within the uptrend and could provide an opportunity.
Uranium ETF Falls with Market (URA)
The Uranium ETF (URA) is one of these commodity-related ETFs that consists of stocks. Overall, I would consider it more commodity-related than stock related. Nevertheless, it got slammed on Thursday-Friday and broke its early April low. The overall trend is up and it was a leader the last few months with higher highs. Thus, the current decline is considered a pullback within a bigger uptrend, and a possible opportunity. The breakout zone and 50-67% retracement zone mark the first area to watch.