Today we are going to dive into the subjective world of chart analysis. The weight of the evidence is bearish for stocks, but it is not overwhelmingly bearish because the S&P 500 breadth models are still net bullish. The market is quite divided and this is why SPY has been flat since September. The January-March decline seemed to break the bull’s back, but the surge in the second half of March produced an outsized gain that could jump start an uptrend. This is why I am featuring some short-term bullish setups today. Overall, I still think risk and volatility are above average.
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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.
A Fresh Look with Plain Charts
I use Amibroker as my main charting tool because the charts are good enough, I can create/test indicators and I can build/test strategies. Amibroker allows me to have eight chart tabs and each tab can show a different chart, such as bar, candle or line. I can also place different indicators on each tab, but, unfortunately, the timeframe must remain fixed (daily is my choice).
Years ago, I used TC2000 from the Worden brothers (TC2000.COM) and they also had a tab system, and I think they still do. TC2000 was lightening fast as well. Charting platforms are like cuisines (Italian, French, Indian, Chinese, Mexican, Caribbean etc..). One is not better or worse than the other and it is largely a matter of preference. Actually, I love them all, cuisines that is.
I am talking about these platforms to highlight the value of seeing different perspectives for the same symbol. I always have a tab with a plain chart that does not contain any annotations or indicators. SPY is shown just under the chart so I can compare performance. This plain view is important because it provides the cleanest and least biased picture. I take notes based on the plain charts and then turn to my annotated charts. Sometimes what I see on the plain chart differs from the annotated chart, and sometimes the two jibe. StockCharts users can create a ChartList with plain charts to do this as well. The chart below shows the Materials SPDR (XLB) with SPY.
The next chart shows XLB and SPY with some annotations. I prefer to compare corresponding price highs and lows to gauge relative performance. I rarely use ratio charts (XLB/SPY). XLB underperformed SPY from May to September as it formed lower highs. Most recently, XLB outperformed SPY because it surged well past its February highs and SPY barely exceeded its February highs. The April pullback was shallower for XLB and deeper for SPY (relative strength for XLB). XLB is already above its March high and SPY is well below its high (XLB leading).
Chart Perspective and Subjectivity (SPY)
Chartists can be like economists. Show 10 chartists a chart and you get 11 opinions, as well as the “on one hand” stuff. Overall, the trend indicators are bearish for SPY, the Composite Breadth Model is net bearish and the market is split, at best. Even so, I can make a bullish argument on the long-term chart for SPY. The last decent correction was September-October 2020 and SPY advanced some 49% from the low in late October 2020. The January-March decline retraced a third to a half of this advance with a falling wedge and SPY broke out of the wedge with a surge in the second half of March. All things being equal, this looks bullish.
The next chart adds two indicators to the mix. CCI-Close (125) is part of the Trend Composite. It turns bullish with a move above +100 and bearish with a move below -100. It was bullish from 5-Aug-2020 to 25-Jan-2022. It is currently bearish and a move above +100 is needed the turn it bullish again.
The lower window shows Normalized ROC (20), which is the 20-day point change divided by the 20-day ATR. The lines are green when the indicator exceeds 3 and red when it exceeds -3. Move above 3 means the 20-day point change is greater than three ATRs, which makes it an outsized move that can jump start a trend. We saw an outsized move in mid October 2020 and with the early November breakout (green arrows). We also saw CCI-Close turn bearish and an outsized decline in late January 2022 (red arrows). The surge in the second half of March pushed Normalized ROC above 3 for an outsized move that could foreshadow a bigger trend change.
Picking Your Spot
I realize that the short-term bullish setup in SPY does not fit my strategy because the long-term trend in SPY is down and SPY is not a leader. Subjectively, we have to ask ourselves if we want to wait for SPY to become a leader with a break above 460 or front run a signal by taking the short-term breakout. The risk-reward profile certainly favors the latter (stop-loss on move below 437).
The chart above recaps the short-term setup that was shown on Tuesday and shunned because it did not fit my strategy. We have a 10% surge (outsized advance) and a decline that retraced 50% with a return to the breakout zone. The decline formed a falling flag and there is a falling flag breakout working. StochRSI also surged above .80 on Wednesday. A strong breakout should hold and continue higher. Failure to hold the breakout and a move below 437 would call for a re-evaluation.
Don't Buy into the Inverse H&S (QQQ)
We will probably start hearing talk of inverse head-and-shoulders patterns in the coming days, especially if the market moves higher. An inverse head-and-shoulder is a bullish reversal pattern that forms after an extended decline. The decline in QQQ was from 410 to 320 (90 points) and the possible head-and-shoulders pattern extends from 320 to 370 (50 points). Thus, the pattern covers over 50% of the prior decline and this does not make sense to me. In addition, the pattern would not be confirmed until a break above the February-March highs, at which time QQQ would be closer to its December high than its March low. This may be a good pattern for click-bait, but it is not a tradable pattern.
Focus on Tradable Patterns and Setups
As with SPY, QQQ is in a downtrend and not a leader right now. In addition, tech-related ETFs are lagging overall. Even so, QQQ has a short-term bullish setup working. The ETF broke out of a falling wedge with the March surge and then retraced 2/3 with the April decline. SPY broke above last week’s high, but QQQ did not as Netflix weighed on Wednesday. There is still a setup and a break above Wednesday’s high would be short-term bullish. I would rather take this trade than wait for a break above the March high (neckline of the head and shoulders). A move below Tuesday’s low would call for a re-evaluation.
The left side of the chart shows successful breakouts in late May and mid October, as well as a failed breakout in late December. Notice that QQQ continued higher after the May and October breakouts. The broad market environment was also different then (bullish) and QQQ was in a long-term uptrend. The late December breakout failed after a sharp decline on January 5th (red arrow). Again, strong breakouts hold and follow through. Plan your trade FIRST and the trade according to that plan.
Watching Software and Semis
The Software ETF (IGV) and the Semiconductor ETF (SOXX) represent important parts of the Technology sector and QQQ. These two need to bounce in order for QQQ to breakout and these two need to participate for QQQ to hold any pending breakout. The first chart shows IGV with an 18% surge from the March low and a two-thirds retracement with a falling wedge into April. A break above Wednesday’s high would be short-term bullish (but still within a long-term downtrend).
The second chart shows the SOXX dipping below its March low in April. This means SOXX is weaker than IGV and QQQ. Looking at price action since March 2021, I can see a 49% advance and an overshoot of the 67% retracement in March and April. A big falling wedge formed in 2022 and SOXX is attempting to reverse the downswing within this pattern. Note the short-term breakout on Tuesday. Even though we saw a pop and drop on Wednesday, the reversal is still there and possible as long as SOXX holds 420. The breakout would go up in smoke with a break below 420.
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
Cybersecurity ETF with Short-term Bullish Pattern (CIBR)
The Cybersecurity ETF (CIBR) is the strongest of the tech-related ETFs right now. CIBR forged its first higher high with the breakout in early March and the Trend Composite turned positive on March 24th. After a 16% surge in March, the ETF worked its way lower with a small falling wedge or pennant. The pattern is not so important. What is important is that this is a consolidation after a sharp advance and this is a bullish continuation pattern. A breakout would argue for further gains and a challenge to the November highs.
H&S and a Pattern within the Pattern
There is also a possible head-and-shoulders pattern brewing in the Biotech ETF (IBB). In contrast to QQQ, this pattern is forming after an extended decline as IBB fell some 33% (59 points) over six months. This bullish reversal pattern formed after a clear downtrend and the height of the pattern is just 16 points.
The right half of the pattern shows a 13% surge and a falling flag. This is the setup within the pattern or the means to “front run” the head-and-shoulders pattern. A flag breakout would be short-term bullish and increase the odds of a break above 135.
Prior Report and Video
- Composite Breadth Model Remains Bearish
- Two Thirds of Stocks in Long-term Downtrends
- Trend Turns Down for SPY
- A Clearly Defensive Picture
- Utes, Food/Beverage and Healthcare Lead
- Oil and Energy-Related ETFs Remain the Big Leaders
- Agricultural Commodities Remain Strong (DBA, WEAT, CANE)
- Industrial Metal ETFs are Not Far Behind (DBB, CPER, COPX)
- Agribiz and Steel ETFs Follow Ag and Industrial Metals
- Aerospace & Defense ETFs Doing the Flag Thing Too
- Precious Metal ETFs Hold Breakouts (GLD, SLV, PALL)
- Residential REIT ETF Stays within Flag
- Strategic Metals ETF Hits Potential Reversal Zone
- Uranium ETF Maintains Uptrend