Mkt/ETF Commentary – Oversold Conditions Surface, RSP Holds Up, Housing and Semis Break December Lows (Premium)

January is Just Like Yearend

Stocks continued their recent ways with small-caps (IWM) and high-beta tech stocks (QQQJ) leading the way lower in January. IWM is down around 8% year-to-date and QQQJ is down around 11%. The year is starting just how it ended: growth and high beta remain out of favor. Defensive groups are not exactly picking up the slack here because the Utilities SPDR (XLU), Real Estate SPDR (XLRE) and Consumer Staples SPDR (XLP) are down. ETFs related to the Finance and Energy sectors are performing the best this year. Also, the commodity related ETFs are performing well (DBE, DBA, DBB, COPX).

As noted on Tuesday and last week, the markets are going through a transition phase and volatility is above average, which means risk is above average. Tech-related ETFs broke down in December and selling pressure extended into other groups in January (semis, housing). Even so, the Composite Breadth Model remains net bullish and the market is more split than outright bearish. Note that the S&P 500 EW ETF (RSP) remains in an uptrend overall.

IWM Weakness, SPX Breadth and Commodities

This video covers three areas. First, I look at the Russell 2000 ETF (IWM) and show that relative weakness in small-caps is a non-issue for the broader market ($SPX). It just means avoid small-caps. Second, I will show three S&P 500 breadth indicators that remain bullish, and have been bullish for over 18 months. Third, we will look at the uptrends in the commodity ETFs (DBE, DBB, DBA) and then take a quick stab at GLD and SLV.

SPY Becomes Oversold

SPY is down just over 5% in two weeks and oversold as the Momentum Composite plunged to -5. This is just the fifth time in 12 months that SPY has become oversold (Momentum Composite at -3 or lower). The yellow shading shows when the indicator hit -5 twice in mid December as SPY fell around 4.3% in two weeks. SPY got a 3-4 day bounce and then fell below the September low for a second dip.

Currently, SPY is near support from broken resistance and the December lows. The combination of oversold and support argue for a bounce, but I am not sure how long it will last. Personally, I think the odds favor a dip to the rising 200-day before this pullback is complete. The fact that SPY is back at support for the third time tells us that buying pressure is not as strong as it once was. SPY should have held near 460 and instead fell all the way back to the December lows as selling pressure increased.  

RSP is Chopping Higher

The S&P 500 EW ETF (RSP) is stronger than SPY right now because it remains well above its December lows. The uptrend since May is quite choppy because RSP was around 153 in May and is currently just above 157 (eight months later). Despite a small gain, there is a clear rising channel present on the chart and a new high in early January. RSP is pulling back after this new high and also short-term oversold as the Momentum Composite hit -3.

IWM Breaks Spring-Summer-Fall Lows

The Russell 2000 ETF (IWM) and Russell Microcap ETF (IWC) broke below their March 2021 lows and are the weakest of the little guys. The S&P SmallCap 600 SPDR (IJR) is back near the lows from March, July and September (going nowhere). The S&P MidCap 400 SPDR (MDY) is a little stronger than the small-cap ETFs, but its December breakout failed after a hard decline the last two weeks.

QQQ Breaks December Low

QQQ is also short-term oversold after a 9% decline in three weeks. Note that QQQ peaked in late November and broke its December lows. The ETF is lagging SPY and RSP, and also showing more volatility (risk). QQQ is short-term oversold and near the 67% retracement, which could give way to a bounce. However, as the prior pullbacks show, QQQ often bounces after becoming oversold and then dips below the oversold low before bottoming (second dip). Overall, QQQ shows above average volatility right now and risk remains above average. XLK looks similar.

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

Uptrend and Leading (no setup)


ETFs related to Finance, Energy and Consumer Staples continue to lead the market and there is no change in the overall analysis. They are in uptrends and there are no setups. Note that the Regional Bank ETF (KRE) and Bank SPDR (KBE) were hit pretty hard the last two days. This is a reminder that these two are still correlated to the broader market and they were up over 15% from 20-Dec to 14-Jan. Some backing and filling, as in a pullback or correction, after a sharp advance would be normal.

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

Pullback after New High


I covered the Materials SPDR (XLB) and Infrastructure ETF (IFRA) on Tuesday. Both hit new highs in early January and pulled back the last two weeks. They have yet to become oversold and I do not see setups on their charts yet. The same is true for the Utilities SPDR (XLU) and Residential REIT ETF (REZ). They are in uptrends overall, hit new highs in late December or early January and are in the midst of pullbacks. The Real Estate SPDR (XLRE) also hit a new high and pulled back rather sharply the last few weeks. In fact, XLRE is the only one of the group that became oversold.

The first chart shows XLU with a falling flag pullback. This looks like a tempting bullish continuation pattern, but note that XLU has a history of breakout failures. Moreover, XLU moved to new highs after the breakout failures in June and November. A flag breakout would still be bullish here, but don’t be surprised to see a little post breakout noise.

The next chart shows the Real Estate SPDR (XLRE) with an 18% surge to new highs and a sharp decline back to the early December lows. Also note that the Momentum Composite became short-term oversold the last two days and the decline retraced 67%. Thus, this could be a short-term reversal zone and a break above Wednesday’s high would be short-term bullish.

The Momentum Composite aggregates signals in five momentum indicators. RSI(10) is oversold below 30 and overbought above 70. 20-day StochClose is oversold below 5 and overbought above 95. CCI Close (20) is oversold below -200 and overbought above +200. %B (20,2) is oversold below 0 and overbought above 1. Normalized ROC (10) is oversold below -3 and overbought above +3. Normalized ROC is the 10-day absolute price change divided by ATR(10). -3 means three of the five indicators are oversold and +3 means three of the five are overbought.

The Momentum Composite and StochClose are part of the TIP Indicator Edge Plugin for StockCharts ACP. Click here for more details.

Short-term Oversold after New High  


Healthcare did not offer a safe-haven in January as the Healthcare SPDR (XLV) and Healthcare Providers ETF (IHF) fell 6.5% and 8%, respectively. Both ETFs retraced around 67% of their prior declines and became oversold this week. These declines, however, are quite sharp and do not fit into the “controlled descent” category, which is my preference for a tradable pullback. The first chart shows XLV with a falling wedge. A wedge breakout and/or StochRSI pop above .80 would provide the first bullish sign.

The second chart shows IHF becoming oversold twice this year as it fell below the early January low. The ETF remains above the December low and shows less weakness than ETFs that broke their December lows. Nevertheless, it is very volatile so the chances of whipsaw are above average. A short-term setup is there with the ETF oversold and near the 67% retracement. Watch for a StochRSI pop above .80 for the first bullish signal.

December Breakouts Holding


I covered the ETFs above on Tuesday and they continue to perform well in January (CPER less so). The chart below shows COPX with a breakout on December 7th, some post breakout noise into December 20th and a sharp move higher the last few weeks. Now is time to manage the trade and the options include: 1) close half and set a stop for the remainder at breakeven (then trail), 2) set a trailing, 3) set a profit target for all or part, 4) exit when the bigger trend reverses.

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

The Strategic Metals ETF (REMX) is in an uptrend overall and has a breakout working from late December. The ETF dipped immediately after the breakout and then bounced last week. REMX fell back this week, but remains above the early December low (green line). A close below this level would negate the December breakout.

December Breakouts Failing DRIV, IDRV, (CARZ next?)

The Electric Vehicle ETFs are in uptrends, but the December breakouts are failing for the Autonomous EV ETF (DRIV) and Self-Driving EV Tech ETF (IDRV). Both broke out in late December, consolidated around the breakout zones and then fell below their early January lows on Wednesday. This is looking more like a failed breakout. It is not enough to derail the long-term uptrend, but the failed breakout shows that these tech-heavy ETFs are not immune to broad market weakness. Note that there are quite a few semiconductor stocks in these two ETFs (NVDA, QCOM, INTC, MU, NXPI, XLNX to name a few).

The legacy auto manufacturers dominate the Global Auto ETF (CARZ). This ETF remains in a long-term uptrend, but this uptrend is very choppy with long periods of flat trading and failed short-term breakouts. Expect some volatility. The late December breakout is still holding, but the ETF fell rather sharply the last three days and is still correlated to the broader market.

Note that CARZ fits in the Consumer Discretionary sector and the EW Consumer Discretionary ETF (RCD) broke below its December lows with a sharp decline the last two weeks.  Even though the trend remains up, weakness in Consumer Discretionary could be a headwind for this cyclical group. The next chart shows RCD breaking its 200-day SMA and the RCD:RSP ratio hitting a 52-week low, which makes it a serious laggard.

Retail SPDR Breaks as Home Construction ETF Lags

The Home Construction ETF (ITB) and Retail SPDR (XRT) are also part of the Consumer Discretionary sector, which is the most economically sensitive sector and one that warrants our attention. The first chart shows XRT breaking out to a new high in November, failing to hold this breakout and continuing lower. XRT is well below its 200-day, which is rolling over.

The next chart shows ITB breaking its December lows (green line). The December lows are benchmark lows that we can use to separate the leaders from the laggards. SPY is trading near its December lows, QQQ broke its December lows in early January and IWM broke its December lows this week. ITB is still in a long-term uptrend, but no longer holding up and trading turned volatile in 2022. The ETF is oversold and near the 67% retracement, but relative weakness and the uptick in volatility in 2022 keep me sidelined right now.  

Broke December Lows FIVG, SOXX (IGN soon?)

The Next Gen Connectivity ETF (FIVG) and Semiconductor ETF (SOXX) were holding up rather well in 2022, but even these two stalwarts broke below their December lows this week. Note that I do not consider support breaks as bearish signals. The break below the December low shows that FIVG and SOXX are no longer holding up and are moving into the lagging half of the market. They are at the top of the laggard group because they hit new highs just a few weeks ago. The chart below shows SOXX becoming short-term oversold as the Momentum Composite hit -4. The January decline looks like a fat and volatile flag, which is not my preferred pattern for oversold conditions. I would rather see a narrow flag or wedge. Again, SOXX shows an uptick in volatility and I would prefer to let the dust settle and wait for decent setup.

Keep in mind that the Semiconductor ETF is still a tech-related ETF and it is unlikely to be immune to broad market conditions. The same is true for the Networking ETF (IGN), which was hit hard the last few weeks. The trend is still up and the ETF became very oversold the last two days as the Momentum Composite dipped to -4. IGN is also back near its prior support zone (blue shading). This argues for a short-term oversold bounce, but there could still be a second dip in the coming days/weeks.

Normal Corrections After New Highs


The December low is the short-term benchmark low and the summer-fall lows are the medium-term benchmark lows. ETFs that broke their summer-fall lows are clearly lagging and in downtrends. ETFs that broke their December lows, but did not break their summer-fall lows are holding up better. The chart below shows IGV breaking its summer-fall lows as it fell 21%. The ETF is still above its spring lows and holding up better than ETFs that broke the spring lows (FDN, CLOU, FINX). Nevertheless, it is in a long-term downtrend, lagging and off my radar right now.

The Cybersecurity ETF (CIBR) peaked in late November and fell some 15% into mid January. The decline started from a new high and retraced around half of the prior advance (March to November). CIBR remains on my radar because this correction still looks like a normal correction. A falling wedge also formed and the ETF became oversold twice in January. Thus, we saw a second dip after the first oversold reading and CIBR looks primed for an oversold bounce within the wedge correction. A break out of the wedge is needed to end the corrective period and signal a resumption of the March-November advance.

The next chart shows the Lithium Battery Tech ETF (LIT) with a falling wedge that retraced a little less than 50% and returned to the September lows. A falling wedge is typical for a corrective pattern within a bigger uptrend, which is why I have it on my radar. LIT became oversold twice in December and continued lower into January. The ETF is still correcting and it would take a break above the early December high to reverse the falling wedge.

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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