Market and ETF Report – Bear Market Continues to Broaden, Energy and Agriculture Hold Up, Industrial Metals Hit (Premium)

Big Declines and Extremely Oversold

Stocks became extremely oversold last week after a sharp five day decline that looked like a selling climax. This five day decline was already on top of a sharp decline from April 21st to 27th (-8.5%). All told, there was a very sharp three-week decline from April 21st to May 11th (-11.5%) that created some extreme oversold conditions.

We will look at some of these conditions today and highlight some stock-related ETFs that held up relatively well (XLV, XLP, SPLV, XME). Keep in mind, however, that the Composite Breadth Model is still bearish and we are in a bear market. Extreme oversold conditions could give way to a bounce, but we need a lot more than an oversold bounce to turn the market bullish again. This report will also update the ETF leaders, energy and agriculture, and look at the wild rides in the metals-related ETFs.

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 – 17 May: Market-ETF Report and Signal-Rank Table Update
  • Wednesday – 18 May: Market-ETF Video and Market Regime Update
  • Thursday – 19 May: Market-ETF Report and Signal-Rank Table Update

When Oversold becomes a Sign of Weakness

Oversold conditions within an uptrend are considered opportunities to participate in the uptrend. These normal pullbacks offer a chance to participate in the uptrend at lower prices. The pullbacks up until January 2022 were normal garden-variety pullbacks that created modest oversold conditions. The “pullbacks” in 2022 were not normal. These declines went further and led to oversold conditions that lasted longer than normal. This is because selling pressure was much more intense and strong enough to reverse the bigger trend.

The chart below shows the S&P 500 SPDR (SPY) with the Trend Composite as the green-red line below the bar chart. The Trend Composite is currently red, which implies a downtrend. The other three windows show three oscillators to measure overbought and oversold. The Momentum Composite becomes oversold with a move to -3 or lower. The percentage of S&P 500 stocks above the 20-day SMA becomes oversold with a move below 20% and the percentage of stocks above the 50-day SMA becomes oversold with a move below 30%.

The yellow shading shows the modest oversold conditions that preceded decent bounces and a price move to new highs (March to December). These indicators became more oversold than normal with the January decline. We then saw extended oversold conditions in February-March as %Above 50-day SMA dipped below 30% a few times (red shading) and again in April-May as %Above 20-day SMA dipped below 20% a few times (red shading). These are unhealthy oversold conditions that confirm the existence of a downtrend in the S&P 500 and a bear market.

You can learn more about my chart strategy in this article covering the different timeframes, chart settings, StochClose, RSI and StochRSI.

Bounce Targets for SPY and QQQ

The next chart shows SPY with the Trend Composite and the 5-day Rate-of-Change. There is the big breakdown in January, the sharp counter-trend advance into late March and the extended move lower into early May. The red dashed lines capture the downtrend with lower lows and lower highs. SPY became oversold with extreme 5-day decline that exceeded the lower line. Note that 5-day ROC exceeded -5% four separate times this year and not once in 2021. Again, this shows strong downside pressure that is more indicative of bear markets.

Oversold conditions represent opportunities when the bigger trend is up and the Composite Breadth Model is bullish. The trend is down and the Composite Breadth Model is negative right now so oversold conditions are not seen as opportunities. While an extreme oversold condition can still lead to a bounce, the bigger forces at work are bearish and I am not interested in these setups right now. Having qualified that, a bounce could extend to the 420 area (broken support turning resistance). The next chart shows QQQ with similar characteristics and a potential resistance zone in the 320 area.

You can learn more about exit strategies in this post,
which includes a video and charting options for everyone.

Bounce Targets for Three Big Sectors

The big sectors were also very oversold last week and ripe for a bounce. Again, they are in downtrends overall so these are bounces against the dominant force. Picking future resistance or support levels is based on an educated guess so take these with a grain of salt. Classical technical analysis teaches us that broken support levels turn into future resistance levels, but this is still pretty subjective.

The next few charts show some potential resistance levels with the blue shading and the lower indicator window shows the 5-day Rate-of-Change for reference. The first chart (above) shows XLK with broken support in the 141-143 area and resistance from the early may high in the 148-150 area. Perhaps we will see resistance somewhere in between. The subsequent charts show XLY with possible resistance in the 161-163 area and XLF with possible resistance in the 35.5-36 area.

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

Healthcare Holds Up Better than SPY

The Healthcare SPDR (XLV) held up better than SPY and the big other sectors because it did not break its January-February lows. The Jan-Feb lows also held above the October lows and XLV hit a new high just five weeks ago, which seems like five months ago. XLV is also showing short-term relative and absolute strength because it recorded a six day high on Monday and exceeded last Wednesday’s high (red line). XLV, XLP and XLE are the only three sectors that exceeded last Wednesday’s high. Thus, we have a short-term breakout working in XLV.

Staples, Utilities and Defensive ETFs Leading

The Energy SPDR (XLE) is by far the strongest of the 11 sectors because it hit a new high on Monday. The Consumer Staples SPDR (XLP) and Utilities SPDR (XLU) are the next strongest because their Trend Composites are still positive and the April-May pullbacks were normal. Throw in XLV and we have a market with the defensive sectors and energy leading. This is not a risk-on configuration that favors the high-beta sectors, such as XLK and XLC. This is a risk-off configuration.

The charts above/below show XLU/XLP hitting new highs in April and retracing 50 to 67 percent of these advances with the declines into May. XLP has a falling wedge working and is on the verge of a breakout. The pattern (falling wedge) and retracement amount (~50%) are typical for corrections within a bigger uptrend. XLU fell to the pennant lows (support) and firmed the last two weeks. A breakout would reverse these corrections and signal a resumption of the bigger uptrends.

The next two charts show the S&P 500 Low Volatility ETF (SPLV) and Food & Beverage ETF (PBJ) because they also represent the defensive end of the market. The Select Dividend ETF (DVY) fits in this group as well.

XLB Remains Range Bound

The Materials SPDR (XLB) is also holding up better than ETFs that broke their February lows, but it is not in an uptrend. Overall, XLB is in a trading range and testing the lower end of this range (support). The ETF became oversold in late April and early May as the Momentum Composite dipped to -3. Thus, we have XLB oversold and at support. A break above Wednesday’s high would be short-term bullish.

Aerospace & Defense ETFs Test Support Zones

Hanging our hat on a narrative can be a dangerous thing because price action often precedes the narrative (story behind the move). Even so, I still think that an increase in defense spending is a theme going forward. Whether or not this will lead to higher prices for defense stocks remains to be seen. Perhaps inflation and increased costs are cancelling out the increase in defense spending. The charts for the Aerospace & Defense ETF (ITA) and Aerospace & Defense ETF (PPA) show breakouts just after the invasion of Ukraine and sharp declines along with the stock market in April-May.

These declines turned the Trend Composite negative and both are trading back near their December-February lows. This looks like a support zone and both ETFs became quite oversold. These conditions could give way to at least a bounce. The blue lines represent the rate of descent (steepness of trendline) and the red lines mark short-term resistance to watch for a breakout. A trendline break signals a change in the rate of descent, while a higher high show buying pressure at higher levels.

MOO Takes a Big Hit, but Holds Prior LowsOut

The Agribusiness ETF (MOO) is emblematic of what is happening in some of the April leaders (XLV, PPA). There was an extremely sharp decline from a 52-week high and this decline was enough to turn the Trend Composite negative. Even so, these ETFs did not break their January-February lows and have yet to forge lower lows. Thus, the chart suggests that the uptrend is still intact. MOO fell some 15% from late April to early May and held just above the December-February lows, but the Trend Composite hit -1 as three trend indicators turn bearish. MOO reversed the sharp downswing with a break above the upper trendline and last Wednesday’s high. It is also leading short-term with this move.

XME Remains with a Normal Retracement

The Metals & Mining SPDR (XME) hit a new high in April and then fell over 20%. Even so, the Trend Composite did not turn bearish and the ETF did not come close to its January low. Instead, XME retraced around 2/3 of the prior advanced with a falling wedge and found support near broken resistance (blue shading). A move above 53 would trigger a wedge breakout and reverse the short-term downswing.

Oil Extends on Breakout as XLE Hits New High

West Texas Intermediate ($WTIC) broke out of a triangle in early May, dipped below 100 early last week and then surged above 110. Volatility remains the order of the day short-term, but the long-term trend is clearly up and the wedge breakout is bullish. The early May breakout signals a continuation of the bigger uptrend and argues for a move above 130. The DB Energy ETF (DBE) is slightly stronger because it has a significant weighting in natural gas.

The Energy SPDR (XLE) is leading the energy-related ETFs with a move to new highs on Monday. There is no setup here, just a leading uptrend.

The other two charts show the Natural Gas ETF (FCG) and Oil & Gas Equipment & Services ETF (XES) with bullish setups. FCG consolidated with a wedge the last few weeks and this is deemed a bullish continuation pattern. As such, a breakout is expected.  

XES corrected more with a falling wedge that  retraced around half of the prior advance and found support near broken resistance (62-63 area). Again, the retracement amount and pattern are typical for corrections within a bigger uptrend. A breakout is in the making and this signals a continuation higher. Note that the Small-cap Energy ETF (PSCE) sports a similar setup.

Agriculture ETFs Catch Fire

The DB Agriculture ETF (DBA) also regained its lead with a surge to new highs. DBA was highlighted last week as the Momentum Composite became oversold (-5). Also note that DBA is not an equity ETF and the long-term trend is up. This makes oversold conditions more “interesting” because the a resumption higher is expected when the bigger trend is up. StochRSI popped above .80 on Wednesday (green arrow) and DBA broke the upper line of the falling channel on Thursday.

The Wheat ETF (WEAT) and Sugar ETF (CANE) took part in the move as WEAT extended on its wedge breakout and CANE broke out with a two day surge. These two were also featured last Tuesday.  

Metals ETFs Are Way Oversold

The Gold SPDR (GLD), DB Base Metals ETF (DBB) and Palladium ETF (PALL) fell sharply the last four weeks to become very oversold. These three peaked in early March, formed lower highs from March to April and lower lows from March to May. Volatility is through the roof and the outsized declines of the last four weeks are atypical for corrections within a bigger uptrend. Even so, support levels are at hand and they are short-term oversold. GLD is just above its December-January lows, which mark a support zone. The swing is down and a break above 173 is needed for a short-term breakout.

DBB is just above its December lows and the Trend Composite is still positive (+1). The ETF was oversold for most of the last four weeks as the decline extended. A break above 22.6 would reverse the downswing.

The Palladium ETF (PALL) is testing the January lows and the Trend Composite turned negative (-1). The decline, however, still looks like a massive falling wedge, which means it could be just a correction with an overshoot on the downside. The Momentum Composite hit -4 last week to become oversold. A move above 200 would trigger a breakout and reverse the falling wedge.

The Platinum ETF (PLTM) remains at an interesting juncture as it tests support in the 9 area. PLTM is also holding up better than the other three metals over the last four weeks because it did not forge a lower low from late April to early May. The ETF surged in early May, fell back last week and held above the late April low as it firmed the last two days. A bounce from here would be the first bullish sign and a break above the early May high could reverse the downswing that has been in place since March.

You can learn more about my chart strategy in this article covering the different timeframes, chart settings, StochClose, RSI and StochRSI.

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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