Market and ETF Report – Oversold Bounces within Bigger Uptrends, The Real Leaders, Chart Strength by Holding Jan-Feb Lows (Premium)

There was a big oversold bounce with some of the most beaten down ETFs leading the way. The ARK Innovation ETF (ARKK), Clean Energy ETF (PBW), Consumer Discretionary SPDR (XLY), Cloud Computing ETF (SKYY) and Home Construction ETF (ITB) were up over 10% in three days. These are big bounces for sure, but all five of these ETFs hit 52-week lows in May and remain in long-term downtrends. They were not in uptrends in May and they were certainly not leading. The chart below shows each with 3-day ROC in the indicator window.

As noted before, ETFs that are lagging and in downtrends do not fit into my strategy and are ignored. I am looking for uptrends, some sort of relative chart strength and tradable pullbacks within the uptrend. Furthermore, the Market Regime is bearish and this makes me very selective with stock-based ETFs. There will be bear market bounces and some stock-based ETFs will buck the broad market trend, but risk levels are still above average in a bear market.

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 – 31 May: Market-ETF Report and Signal-Rank Table Update
  • Wednesday – 1 June: Market-ETF Video and Market Regime Update
  • Thursday – 2 June: Market-ETF Report and Signal-Rank Table Update
  • Saturday – 4 June: ETF Signal and Rank Table

Oversold Bounces for SPY and QQQ

SPY and QQQ are in the same boat as the ETFs above. They recorded 52-week lows in May, they are in downtrends and they got big oversold bounces. SPY surged 6.6% last week and is nearing its first resistance zone from the 50% retracement and broken supports (blue shading). An oversold bounce could also extend to the 430 area, which marks the 67% retracement and early May high. Picking resistance is an educated guess. The overall trend, however, is not an educated guess. It is down with a breakdown in January, a lower high in April and a lower low in May. More work is needed to reverse this downtrend and turn the Market Regime bullish again.

QQQ is also in the midst of an oversold bounce within a bigger downtrend. The yellow shading on both charts shows when these two ETFs dipped below the lower line of the falling channel and were oversold. The oversold bounce is alleviating these oversold conditions, but it is far from enough to reverse the bigger downtrend. When a counter-trend bounce is under way, I add the retracements tool, look for broken supports and identify prior resistance to guesstimate the next resistance zone. A 50% retracement of the April-May decline and a return to broken support would carry QQQ back to the 320-325 area.

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

Four New Trend Signals

There were four new Trend Composite signals on the ETF Trend Signal and Ranking Table. The Mexico ETF (EWW) and Palladium ETF (PALL) triggered bullish three days ago, the Gold SPDR (GLD) triggered four days ago and the EW Materials ETF (PSCM) triggered bullish on Friday. The signal in PSCM is really for observational purposes because this ETF is thinly traded. It does, however, tell us that the Materials sector is strong and this fits with the general theme favoring commodity-related ETFs right now.

Strength within the Materials Sector


The chart below shows the EW Materials ETF (RTM) with a choppy uptrend since late summer, a pullback into mid May and a breakout last week. The Trend Composite is positive and this is one of the stronger charts in my ETF universe. RTM represents the “average” stock within the materials sector and strength here bodes well for the sector overall.

The Materials SPDR (XLB), which favors a handful of large-caps and big chemical companies, is in a trading range since May 2021. The ETF hit range support in early May, broke short-term resistance on May 17th and surged above the mid May high last week. This is an upswing within a trading range.

Energy-Related ETFs Are the Real Leaders


The energy-related ETFs surged to new highs and ETFs hitting new highs are the real leaders. I will first review oil because it is the main driver here. The chart below shows West Texas Intermediate ($WTIC) breaking out of the larger falling wedge in early May and continuing higher after this breakout. The wedge represents a correction after the December-March advance and the breakout signals an end to this corrective period (and a resumption of the bigger uptrend). New highs are expected after this continuation breakout. Support is set in the 100 area for now. The bottom window shows the DB Energy ETF (DBE) breaking out of a triangle consolidation.

The Energy SPDR (XLE) is leading the group with a new high. There is no setup, just a strong and leading uptrend. The first chart shows the Small-cap Energy ETF (PSCE) playing catchup with a flag breakout and move to new highs last week. As noted last week, the setup was classic: 50% retracement of prior advance, return to breakout zone and bullish continuation pattern (flag).

The next chart shows the Oil & Gas Equipment & Services ETF (XES) with similar chart characteristics, oversold conditions as the Momentum Composite dipped to -3 and a breakout. XES has yet to hit a new high, but is expected to hit a new high because the trend is up and it broke out of a bullish continuation pattern.

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

The next chart shows the Natural Gas ETF (FCG) breaking out of a triangle and hitting new highs. There is no setup on this chart now – just a strong and leading uptrend. The Oil & Gas Exploration & Production ETF (XOP) also has a triangle breakout and new high.

The next chart shows the Saudi Arabia ETF (KSA) with a short-term reversal off support.

Agriculture-Related ETFs Remain Strong


The DB Agriculture ETF (DBA) is not far behind the DB Energy ETF (DBE) when it comes to uptrend and market leadership. DBA is in a strong and leading uptrend with a new high in mid May. The ETF broke out of a falling channel after becoming oversold in mid May (red arrow). DBA fell back last week and formed a small falling wedge, which is a short-term bullish continuation pattern. It is a pullback within an uptrend and there is a breakout working after the advance last Thursday-Friday.

The Wheat ETF (WEAT) also hit a new high with a surge above 12 in mid May and fell back the last eight days. The pattern looks like a surge and falling flag, which is a short-term bullish configuration. Keep in mind that an eight day pattern is very short-term and we can expect more noise with short-term price movements. A flag breakout would signal a continuation higher and open the door to new highs.

The next chart shows the Sugar ETF (CANE) with a surge above 10 in mid May and an eight day pullback that looks like a pennant, which is also a short-term bullish continuation pattern.

The next chart shows the Coffee ETF (JO), which was featured on Friday. The Trend Composite is negative, but the falling wedge over the last few months looks like it could be a correction after the July-February advance (subjective analysis). A break above the mid May high (red line) would be bullish. Within the bigger wedge, a small falling wedge formed after the mid May surge and JO broke out of this small wedge last Thursday.

Metals & Mining SPDR Surges After Normal Retracement


The Metals & Mining SPDR (XME) is stronger than the six ETFs shown in the CandleGlance chart above and this is why it warrants my attention. XME is also a leader because it hit a new high in April and the subsequent pullback retraced a normal amount with a 2/3 retracement of the prior advance. The ETF also managed to hold its uptrend during the April-May decline. XME then found support at the prior breakout as it formed a falling channel and became oversold in late April and early May. Again, this is the recipe for a tradable pullback within a bigger uptrend (normal pullback/retracement, bullish continuation pattern, return to broken resistance, oversold). A close below 50 would argue for a re-evaluation of this breakout.

Base Metals and Gold Hold Uptrends and Reverse Downswings


The DB Base Metals ETF (DBB) experienced a sharp pullback in April-May, but the Trend Composite stayed bullish and the uptrend on the price chart maintained its consistency by holding above the November-December lows (higher lows). The swings since December have been big as the ETF surged 30% from December to February and fell 20% from February to May. DBB reversed its downswing with a breakout in mid May and this breakout is holding. The green line shows an initial re-evaluation level based on the prior low. The red line shows the ATR Trailing Stop starting at this level and rising as prices rise. I am still inclined to add a little buffer and re-evaluate on a close below 22. The Copper ETF (CPER) is covered further below because it is not as strong as DBB.

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

The Gold SPDR (GLD) chart looks fairly similar to DBB in that it hit a new high in March and held above the November-December lows after the deep pullback in April-May. GLD also reversed its downswing with a short-term breakout last week. The ATR Trailing Stop is shown for reference and I would re-evaluate on a close below 169.

Agribiz and Healthcare Hold Prior Lows Reverse Downswings


The Agribusiness ETF (MOO) also hit a new high in April and fell sharply into May. The pullback was not normal because it almost reached the January-February lows and the Trend Composite turned negative for several days. MOO stood out for two reasons: it hit a 52-week high in April and did not break its January-February lows. Perhaps the round trip from 90 to 109 to 92 was one big overshoot up and down. In any case, the higher lows persist and MOO held up better than most during the April-May decline. The ETF broke short-term resistance in mid May and surged above its mid May high last week. A close below 94 would argue for a re-evaluation of this breakout.

The Healthcare SPDR (XLV) is a bit similar to MOO because it hit a new high in April and had a deep pullback. XLV held the January-February lows when many stock-based ETFs were breaking these lows. The ability to hold these lows showed relative chart strength. XLV reversed the April-May downswing with a breakout in mid May and surged above the mid May high last week. A close below 128 would argue for a re-evaluation of this breakout.

Aerospace & Defense ETFs Surge off Support


ITA and PPA fit with the group of ETFs that hit new highs, experienced abnormal pullbacks and still held the January-February lows. These two reversed their downswings with short-term breakouts in mid May, tested their early May lows on May 20th and surged above their mid May highs the last five days. The April-May downswing clearly reversed with this surge and the short-term trend is up until proven otherwise. The red line shows the ATR Trailing Stop, which is 2 ATR(22) values below the highest close since the breakout on May 17th.

Copper ETF Reverses Downswing within Trading Range


The Copper ETF (CPER) reversed the downswing within a trading range that extends back a year. CPER is clearly not in a consistent and persistent uptrend, which sports higher highs and higher lows. Copper is range bound with equal highs and equal lows. Support in the 24.2-25 area (green shading) extends back to March 2021 and the ETF held this level in early May. The April-May downswing reversed with a breakout in mid May and this breakout is holding. The red line shows the ATR Trailing Stop starting near the May low and rising long with prices over the last week or so. Adding a buffer, I would

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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