Mkt/ETF Commentary – Market Regime Changes, Defensive Groups and Commodity-Related ETFs Lead (Premium)

Composite Breadth Model Turns Net Negative

Weakness under the surface and weakness within the Nasdaq 100 is weighing on the S&P 500, which cracked again. The weight of the evidence was already bearish for small-caps, mid-caps and the Nasdaq 100. This means the majority of the market was not in good shape. Furthermore, Nasdaq 100 stocks account for some 35% of the S&P 500 and this means one leg of the three legged stool was missing. With a sharp decline the last nine days, the S&P 500 5-day SMA moved back below the 200-day SMA and the Composite Breadth Model is back bearish.

The market was already split before the Composite Breadth Model turned net bearish. The S&P 500 was split last week and remains split with just 47% of component stocks above their 200-day SMAs. Even though we are seeing whipsaws here in 2022, I will stick with the model and trade accordingly. This means avoiding bullish signals and setups in stock-related ETFs. At the very least, it means increasing selectivity when it comes to stock-related ETFs because risk is above average when the Composite Breadth Model is bearish. Note that I updated the Market Regime page today.

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.

SPY and RSP are not Islands

The S&P 500 SPDR (SPY) and S&P 500 EW ETF (RSP) were performing better than the other major index ETFs because the Trend Composite turned positive in late March. These bullish trend signals, however, were overshadowed by weakness elsewhere. First, the Trend Composite remained negative for the Nasdaq 100 ETF (QQQ), S&P MidCap 400 SPDR (MDY), S&P SmallCap 600 SPDR (IJR) and Russell 2000 ETF (IWM). The image below comes from the ETF Trend Signals and Ranking Table. The Trend Composite is positive for SPY and RSP, but -5 for the other major index ETFs.

Second, defensive groups were leading and several key offensive groups were lagging. This was noted last Tuesday. The table below shows the signals for the sector SPDRs. Notice that the Trend Composite is negative for the five offensive sectors (XLK, XLY, XLF, XLI, XLC). These five sectors account for two thirds of the S&P 500, which is well more than half of the market. Three of the five downtrend signals triggered in January. XLF triggered bearish on March 1st and XLC triggered bearish on November 22nd.

Third, the Composite Breadth Model did turn net bullish at the end of March, but the S&P 500 and S&P 1500 breadth models were split. The Composite Breadth Model is back bearish again. Even though the Trend Composite is positive for SPY and RSP, the weight of the evidence is bearish for stocks and the S&P 500 will likely be affected at some point.

SPY Overshoots and then Reverses

SPY surged to the potential reversal zone (blue shading) and even closed above the February highs two weeks ago. This amounted to an overshoot as the ETF reversed with a sharp decline the last nine days. Broken resistance, the February highs and the 67% retracement marked this zone. With the Composite Breadth Model back to bearish and broad market weakness, I am now ignoring bullish setups and the positive Trend Composite. Instead, we now have a breakdown in January and this decline is considered an impulse move, which means it is in the direction of the bigger trend. The subsequent counter-trend bounce reversed last week and it looks like another impulse move is underway. The target is below the February-March lows.

The Trend Composite never turned positive for QQQ and the potential reversal zone worked to perfection. The blue shading marks broken support, the February highs and a 50-67% retracement of the December-March decline. The counter-trend bounce, though strong, started from a lower low in mid March and reversed where one would expect a counter-trend bounce to fail (two steps down and one step up). QQQ is underperforming SPY and weighing on the broader market (S&P 500).

IJR Signals a Continuation Lower

The next chart shows the S&P SmallCap 600 SPDR (IJR) with a breakdown and lower high in early January, a breakdown later that month, a counter-trend bounce that formed a rising wedge and a breakdown last week. This breakdown signals a continuation of the bigger downtrend.

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

Healthcare SPDR and Healthcare Providers Hit New Highs

The Healthcare SPDR (XLV) and the Healthcare Providers ETF (IHF) are leading with new highs in early April, but their uptrends are quite choppy and they are short-term extended.  The first chart shows XLV with new highs in September, January and April. After the January high, XLV fell back to the Sep-Oct lows and eventually held. This deep dip pushed the Trend Composite into negative territory, even though it was a pullback within a bigger uptrend. XLV went on to break out of the big falling wedge and the Trend Composite turned positive again on March 18th. Even with Monday’s sharp decline, XLV is up 10% since the February closing low. This makes it short-term extended and ripe for a pullback or consolidation that could eventually form a bullish continuation pattern (flag, wedge, triangle).

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

The uptrend in IHF is even more choppy because we can see 52-week highs in November, January and April. The Trend Composite turned negative after the November and January highs because the subsequent dips were so deep. I am not going to change my indicator settings to fit this particular chart. It is usually better to stick with a setting that works fairly well for a wide array of ETFs than to adjust the setting for every situation. Sometimes we can overrule the indicator based on a visual assessment of price action. IHF is quite extended after a big run and prior highs led to pullbacks so I would wait for a setup to emerge before jumping on this one.

XLU, PBJ and XLP Tag New Highs

ETFs do not get any more defensive than the Utilities SPDR (XLU), Food & Beverage ETF (PBJ) and Consumer Staples SPDR (XLP). XLU is probably attracting funds as a bond alternative because TLT is in a strong downtrend. The other two provide products that we need regardless of economic conditions, though I am not sure how inflation will affect these two. I do not see any setups on these charts. They are simply in leading uptrends and short-term extended after big moves since mid March.

Agribusiness ETF hits New High

The Agribusiness ETF (MOO) is also leading with a fresh new high last Friday. Short-term, the ETF broke out of a small pennant and then fell  back with the broader market on Monday. Pennants are short-term bullish continuation patterns and the breakout argues for higher prices, provided it holds. A pennant failure would not be viewed as a major negative because the bigger trend is up.

DB Energy ETF Forms Bullish Consolidation (DBE)

West Texas Intermediate ($WTIC) fell back to the March lows with a move below 95 on Monday. The swings since late February are huge and this 20% decline since March 25th is no different. The long-term trend remains up, which means the trading bias is bullish and I favor bullish setups. The falling wedge defines the immediate downswing and a break above last Friday’s close (98.3) would be bullish. The lower window shows the DB Energy ETF (DBE) with a surge in mid March and small triangle/pennant into April. A breakout at 24 would be bullish here.

Energy-Related ETFs Hold Strong

The energy-related ETFs fell along with oil on Monday, but they are all in long-term uptrends and they are holding up quite well short-term (XLE, XES, XOP, FCF). The chart below shows the Energy SPDR (XLE) with a new high on March 8th and a sharp falling flag into mid March. XLE broke out of this flag and recorded a new closing high last Friday. The flag breakout is the last short-term setup/signal and it remains in play. I do not see a short-term setup on the chart right  now.

The Oil & Gas Equipment & Services ETF (XES) is basically XLE on steroids because they move in the same direction and the former has more volatility. XES also formed a steep flag and broke out. This breakout is holding as the ETF gyrates around 75.

Steel ETFs Form Short-term Bullish Consolidations

The Metals & Mining SPDR (XME) and Steel ETF (SLX) held up relatively well over the last two weeks as they simply consolidated after big gains. Like many commodity-related ETFs, they became and remain very extended short-term. They are also in leading uptrends long-term. The short-term is also a challenge because of high volatility. The chart below shows XME forming a possible pennant consolidation after the surge from 54 to 64. A breakout at 64 would end the consolidation and signal a continuation higher. Despite this bullish pattern, I think the possibility of whipsaw is above average because of high volatility and a bearish Composite Breadth Model.

Aerospace & Defense ETFs Remain with Bullish Flags

The Aerospace & Defense ETFs fell back with the rest of the market over the last two weeks (ITA, PPA). ITA and PPA are market-cap weighted and favor large-caps. The stocks in XAR are equally weighted and this favors small and mid caps. The market favors large-caps right now and this makes ITA and PPA preferable over XAR. The chart below shows PPA with a new high in late March and falling flag into April. These are short-term bullish continuation patterns that represent a short correction after a sharp advance. A breakout at 79 would reverse the flag and signal a continuation highe

Copper Miners ETF Pulls Back within Uptrend

The Copper Miners ETF (COPX) hit a new high last week Monday and then fell back with a sharp decline the last five days. This is par for the course with COPX. The ETF sports a volatile uptrend with deep throwbacks along the way. Another deep throwback in this uptrend could extend to the 42 area.

Copper ETF Remains with Messy Uptrend

The Copper ETF (CPER) shows just how tricky it can be to trade pennants when volatility is high. CPER broke out of a pennant last week Monday and then declined below the pennant low. The pennant failed (whipsaw), but the overall trend remains up. In other words, a short-term failure is usually not enough to derail a bigger uptrend. CPER remains in a choppy uptrend with sharp pullbacks along the way and this failed pennant is just part of a deeper pullback within the uptrend.

DB Base Metals ETF Consolidates within Uptrend

Sharp pullbacks in copper and aluminum weighed on the DB Base Metals ETF (DBB) as it fell back the last five days. Zinc held strong and hit a closing high on Monday. Overall, DBB remains in a strong uptrend and within a possible bullish consolidation (short-term). Note how DBB surged from 24 to 26.75 from March 15th to 23rd. The ETF then formed a pennant flag the last three weeks. A surge above 26 would provide the early sign that a breakout is in the making.

Strategic Metals ETF plunges to Support Zone

The Strategic Metals ETF was leading the market with a surge to new highs and then fell back sharply the last five days. This is basically a 34% advance and a 13% decline. The decline retraced around half of the prior surge and returned to the breakout zone. I do not see a falling flag or wedge because this decline is too sharp. Nevertheless, broken resistance turns support and the 50-67 percent retracement zone is an area that could give way to a bullish reversal.

Uranium ETF Holds Strong

The stock market fell pretty hard the last two weeks and even the commodity ETFs fell back. The Uranium ETF (URA), in contrast, held strong and exceeded its March highs with a surge above 27. This shows strength in the face of weakness and this is bullish price action. Overall, URA broke out in early March to reverse the falling channel and extended higher over the last several weeks.

Gold and Silver Break Out

The Gold SPDR (GLD) and Silver ETF (SLV) also showed strength when other ETFs were weak. These two were already setting up bullish with corrections after big advances. They broke out of their corrective patterns with advances the last four days. The first chart shows GLD surging some 16%, correcting with a wedge that retraced 50-67% and breaking out of this wedge. The second chart shows SLV breaking out.

Palladium Surges for a Breakout

The Palladium ETF (PALL) was highlighted last week as it fell back to its prior breakout zone and retraced around 67% of the prior advance. This is three setups forward with a 100% advance and two steps backward with a 33% decline. Despite high volatility, the chart is bullish because this looks like a correction after a big advance. PALL showed signs of ending this correction with a little pop on April 1st and broke out with a surge last Friday.

DB Agriculture ETF Breaks Out

The DB Agriculture ETF (DBA) also performed well when other ETFs were weak. DBA has been in a strong uptrend for some time now. The ETF corrected with a falling wedge into mid March and broke out on March 18th. Even though the post-breakout extension stalled, the breakout held for the most part and a bigger triangle took shape. DBA broke out of this triangle with a surge the last two weeks.

Coffee, Sugar and Wheat ETFs Extend on Breakouts

Wheat, coffee and sugar are part of the DB Agriculture ETF and all three are strong. The first chart shows the Wheat ETF (WEAT) with an 80% surge and sharp correction that retraced just over 50%. A falling wedge/triangle of sorts also took shape. The retracement amount and pattern are typical for corrections within bigger uptrends. WEAT broke out with a gap five days ago and extended further the last two days.

The Coffee ETF (JO) was featured last week as it corrected within a bigger uptrend and broke short-term resistance. The ETF hit a new high in February, declined into March, found support in March and broke the March high.

The Sugar ETF (CANE) is one of these ETFs where the Trend Composite turned negative during a correction and then positive when the correction ended (breakout). CANE hit a new high in November, fell into January with a 50-67% retracement and formed a falling wedge. The ETF broke out of this wedge with a surge in early March and extended to new highs here in April.

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
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