Split Market with Defensive Groups Leading
There are large pockets of strength in the stock market, but also large pockets of weakness. In fact, these pockets are almost equal and this is the reason the S&P 500 has gone nowhere since Thanksgiving. The Composite Breadth Model is net bullish and split. The S&P 500 trend model is net bullish and yet only 52% of component stocks are above their 200-day SMAs.
Within the stock market we are seeing leadership from the defensive groups and weakness in some key groups. The PerfChart below shows performance Russia invaded Ukraine. SPY is up 6.65% with four defensive groups leading the way (Consumer Staples, Food/Beverage, Utilities and Dividend Select).
On the right side, we can see the Finance SPDR (XLF), Semiconductor ETF (SOXX) and Retail SPDR (XRT) lagging badly with smaller gains. The Regional Bank ETF (KRE), EW Consumer Discretionary ETF (RCD) and Home Construction ETF (ITB) are down since the invasion and not participating.
Even though the weight of the evidence is bullish for stocks, I am concerned because some key groups are lagging and defensive issues are leading. Note that commodity-related groups are also leading and today’s report is heavily weighted towards these ETFs. Focus on the leaders with clear uptrends.
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.
Revision Notice: There was a start date error in part 8 of the Trend Composite Strategy (percent-based profit targets). I started the tests on 1/1/2003 when it should have been 1/1/2007. The performance metrics did not change much, but there were fewer trades overall. Article is here.
Composite Breadth Model is Bullish, but…
The Composite Breadth Model turned bullish on March 25th and remains bullish (+1). The S&P 500 Trend and Thrust Models are net bullish, and the SPX 5-day SMA is above the 200-day SMA. The S&P 1500 Trend and Thrust Models are still net bearish. The market is largely split as large-caps are stronger than small and mid caps.
Note that the S&P 500 is also split to some degree because 52.2% of its stocks are above their 200-day SMAs (47.8% below). This indicator, which is part of the S&P 500 Trend Model has yet to break above 60% and turn bullish.
SPY Remains in Potential Reversal Zone
The Trend Composite turned bullish for SPY on March 30th (+1). This signal follows a break above the early March high, a wedge breakout and an exceptionally strong 11-day surge (+10.7% from March 15 to 29). SPY broke the February highs for a day and then fell back last Tuesday and Wednesday. Even though the Trend Composite is positive and the wedge breakout is bullish, SPY remains in a precarious spot short-term. It was overbought last week and the blue shading marks a potential reversal zone. Here we have broken support turning resistance, resistance from the February highs and the 66.7% retracement.
SPY broke down in January and recorded lower lows in March (closing prices). The decline amounts to three steps downward and the bounce is two steps forward. This is the area where a counter-trend bounce would be expected to fail. Even with the Trend Composite turning positive, note that SPY is not a leading ETF and I am more inclined to wait for a short-term bullish setup (no chasing). This could involve a falling flag, falling wedge, a triangle or a 50% retracement (to the 440 area).
The QQQ chart looks similar to SPY with a wedge breakout and big 11 day surge. However, the Trend Composite remains negative and QQQ is currently in a potential reversal zone. The blue shading marks broken support from the December lows, resistance from the February highs and the 50-67 percent retracement zone. QQQ fell back last week and bounced on Monday. As with SPY, a break below last week’s low would reverse the short-term upswing and call for at least a correction of the March surge.
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
Jason Trennert, chairman and CEO of Strategas Research Partners, note that the yield curve is terrible for timing and he is avoiding the long-duration trade (stocks with high multiples and no earnings). Video Link
Chris Verrone of Strategas points out relative weakness in semis. He also notes that we lost upside participation from consumer discretionary, housing and banks. Semis could be next. Verrone also notes the change in leadership and that we should focus on the leaders. Video Link
Jonathan Krinsky, Chief Market Technician at BTIG, points out relative and absolute strength in defensive groups (staples, utilities). Video Link
Oil Gets Oversold Bounce and Wedge Breakout
West Texas Intermediate ($WTIC) is in a leading uptrend. Price action turned volatile in March with four big swings (up, down, up, down). The current swing is down and WTI is well above the mid March low. Oil was also short-term oversold after last week’s 15% decline. Thus, we have an oversold condition and a falling wedge within an uptrend. Oil was up 4% on Monday and broke out of the wedge to reverse the fall.
Energy-Related ETFs Hold Strong
The energy-related ETFs broke out of falling flag patterns around March 21st and extended higher after these breakouts. The Natural Gas ETF (FCG) and Oil & Gas Exploration & Production ETF (XOP) hit new intraday highs on Monday to lead the group. The charts below show the Energy SPDR (XLE) and Oil & Gas Equipment & Services ETF (XES) breaking out of their flags and continuing higher the last two weeks. Note that XLE and XES are at different ends of the energy spectrum. XLE represents the major integrated oil companies and has lower volatility. XES represents future drilling activity and has higher volatility.
Agribusiness and Steel ETFs Consolidate after Surge
The Agribusiness ETF (MOO) and the Metals & Mining SPDR (XME) led the market since late February with big advances and new highs. MOO represents the ties to agricultural commodities and XME is mostly steel. I do not see any tradable patterns on these charts, just leading uptrends. The first chart shows MOO with a surge from 90 to 106. The blue zone marks a potential reversal zone should the ETF pull back (broken support, ~50% retracement).
Copper Miners ETF Hits New High (plus CPER, DBB)
The Copper Miners ETF (COPX) hit a new high on Monday and is leading. The uptrend since early January has been very choppy as the ETF did not form a discernable flag or wedge. Instead, the pullbacks were sharp throwbacks that reversed quite quickly. The bottom window shows that the Momentum Composite did not become oversold because these pullbacks were so short. Sometimes we do not get discernable patterns or oversold indications during short pullbacks. We then have to make a judgement call based on price action. Does it look oversold?
The DB Base Metals ETF (DBB) is also in a leading uptrend and recently turned volatile with a parabolic surge, sharp throwback to the prior breakout and bounce. DBB consolidated around 26 the last seven days and a pennant type pattern could be forming. This is a short-term bullish continuation pattern and a breakout would open the door to more new highs.
Strategic Metals ETF Extends to New High
The Strategic Metals ETF (REMX) caught a strong bid after its breakout and surged some 11% the last five days. REMX hit a new high and joins the leadership group. Note that REMX was up some 17% and overbought at the breakout (22-Mar). It barely digested this gain and then moved higher.
DB Agriculture ETF Holds Short-term Breakout
The DB Agriculture ETF (DBA) is also in a leading uptrend. DBA formed a small wedge correction in mid March and broke out. There was not much follow through as the ETF dipped below 21.5 last week. I would not read too much into the lack of follow through because the bigger trend is up and this is the dominant force at work. It is possible that a bigger triangle is evolving and this is also a bullish continuation pattern (consolidation within an uptrend).
Sugar ETF Holds Its Breakout
The Sugar ETF (CANE) is another example of front-running a Trend Composite signal. The ETF hit a new high in late November and then retraced 50-67 percent of the prior advance with a falling wedge. Even though the Trend Composite turned negative, the retracement amount and pattern are normal for pullbacks within uptrends. It was just a deep pullback. CANE broke out of the wedge on March 2nd and the Trend Composite turned positive a few days later. The breakout is holding and CANE remains in bull mode.
Coffee ETF Bids to End Pullback
The Coffee ETF (JO) hit a new high in February, fell back into March and the Momentum Composite became oversold in late February. JO stabilized in the second half of March with a higher low and broke out with a bounce the last four days. This breakout signals an end to the correction and a resumption of the bigger uptrend.
Wheat ETF Hits Potential Reversal Zone
The Wheat ETF (WEAT) surged some 60% after the invasion of Ukraine and then retraced a little over half of this surge. Note that the long-term trend was up before the invasion. As with most commodity related ETF, WEAT is very volatile right now. Despite this volatility, the structure of the chart is bullish with a setup in the making (pullback within leading uptrend). The pullback retraced a little over half of the prior surge with a falling wedge or triangle taking shape. A breakout would signal an end to the correction and a resumption of the bigger uptrend.
Gold and Silver ETFs Correct after Breakout Surges
The Gold SPDR (GLD) and the Silver ETF (SLV) are also correcting within uptrends. Both surged from early February to early March and then retraced 50 to 67 percent of these advances with falling wedge type patterns. The pattern and the retracement amount are typical for corrections within bigger uptrends. Pattern breakouts would signal an end to the corrections and a resumption of the bigger uptrends. Those looking for a little of both worlds can consider the DB Precious Metals ETF (DBP), which is 80% gold and 20% silver.
Palladium ETF Hits Potential Reversal Zone
The Palladium ETF (PALL) has taken volatility to a new level by doubling from mid December to mid March and falling some 33% from mid March to late March. Russia is/was a major supplier of palladium and accounted for some 40% of total world exports. I would be careful developing a bullish thesis based on Russian exports because palladium could find its way to the markets via China and India. I would also just watch the chart and ignore the fundamentals during the fog of war. Note that PALL broke out in late January, formed a bull flag into February and broke out of this flag with the invasion of Ukraine. PALL is back near pre-invasion levels and just above the prior breakout zone.
Overall, the decline formed a falling wedge and retraced around 67% of the prior advance. The decline also return to the prior breakouts, which combine to mark a support zone (blue shading). Thus, PALL is in a potential reversal zone and we saw a short-term reversal last week. The ETF also broke the upper line of the wedge. Thus, the long-term trend is up, this is a correction within an uptrend and there are signs of a short-term reversal. Volatility is through the roof so smaller positions may be warranted.
A Short-term Setup in the Timber Forestry ETF
The Global Timber Forestry ETF (WOOD) advanced some 54% into May 2021, fell into June and then moved into a trading range. The dotted blue lines show a slight downward slope and this could be a massive correction after the advance. Also note that this decline retraced around half of the advance. WOOD caught my eye because it surged in March and then formed a falling flag the last two weeks. This is a short-term bullish continuation pattern and a flag breakout would argue for an even bigger breakout in the 95 area.
Aerospace & Defense ETFs Consolidate after Breakout Surges
ITA, PPA and XAR all surged in late February and broke out of large consolidation patterns. These breakouts also turned the Trend Composites positive. All three consolidated the last six days or so and these are short-term bullish continuation patterns. The chart below shows PPA with a wedge breakout on March 17th and a surge to new highs by month end. A pennant formed after this new high and this is a short-term bullish continuation pattern.
Large Wedge Breakouts in Play (REZ, XLB, XLV)
It is not often that you get the Residential REIT ETF (REZ), Materials SPDR (XLB) and Healthcare SPDR (XLV) in the same group, but they have similar patterns and breakouts in play. The Trend Composite turned negative for all four at some point this year. Even so, all four held their September-October lows and the falling wedge declines into March were deemed corrections within choppy uptrends. This is the subjective or discretionary side of the analysis equation. All four broke out and these breakouts are holding. They are not true leaders because they have yet to record new highs this year. I do not see any short-term setups on these charts right now.
Cybersecurity ETF Holds Strong
The Cybersecurity ETF (CIBR) remains the strongest of the tech-related ETFs and the only one with a positive Trend Composite. The ETF was the only tech-related ETF to exceed its mid February high in early March. It then formed a falling flag, broke out and surged above the mid March high. CIBR remains in bull mode, but short-term extended and I do not see a setup on the chart.
Clean Energy ETF Extends Bounce within Bigger Correction
The Clean Energy ETF (PBW) extended its advance with a move above the March high on Monday. There is no change overall. The blue lines mark a massive correction after the 500% advance. The swing within this correction turned up with the breakout in mid March and remains up. This short-term reversal within a bigger correction is the early signal. The next signals to look for are a Trend Composite turning positive and a channel breakout.
About those Flag Breakouts in IWO and QQQJ
I noted some bull flags in the Russell 2000 Growth ETF (IWO), Nasdaq 100 Next Gen ETF (QQQJ) and four tech-related ETFs last week. These ETFs broke out of their flags, fell back after the breakouts and bounced the last two days. The first charts shows IWO and QQQJ, which represent the riskiest part of small-caps and tech stocks, respectively. Neither ETF exceeded its February high (relative weakness). QQQJ also started with a lower low in March. The downtrends for both are intact and they are underperforming this year. The flag breakouts are short-term patterns that are going up against the bigger downtrends. This means the odds of success are below average and these will most likely fail. Plan your trade and trade your plan.