Market and ETF Report – Energy and Ag Still Leading, Utilities Hit Moment of truth, Metals-Related ETFs Make a Move (Premium)

The market regime remains bearish because the Composite Breadth Model is negative and yields spreads are showing stress in the credit markets. Note that the BBB spread exceeded its March high over the last few days. Short-term, stocks are still quite oversold after a big decline from mid April to early May. Oversold conditions can be alleviated with time or price. Time would involve a sideways consolidation or trading range. Price would involve some sort of oversold bounce. Even though oversold bounces do occur in downtrends, they are harder to trade during bear markets and when the bigger trend is down. The general rule is to avoid stock-based ETFs during bear markets and to avoid ETFs that are in downtrends. There is no sense fighting both a bear market and a downtrend. The pickings are slim when taking the bear market and downtrends into consideration.

Overall, ETFs related to energy and agriculture continue to lead. ETFs related to other materials are also holding up better than the broader market (steel, metals, materials). We are also seeing less weakness in the Healthcare SPDR and Agribusiness ETF. The last part of this report focuses on ETFs related to metals because held above their prior lows and have short-term breakouts working.

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 – 24 May: Market-ETF Report and Signal-Rank Table Update
  • Wednesday – 25 May: Market-ETF Video and Market Regime Update
  • Thursday – 26 May: Market-ETF Report and Signal-Rank Table Update

SPY and QQQ are Still Near Oversold Levels

SPY and QQQ became oversold on May 6th, bounced for three days and fell below their early May lows last week. These two were back oversold last week and managed a small gain on Monday, but a bounce at this stage is still just an oversold bounce within a bigger downtrend. Oversold bounces will occur, but they have stiff headwinds because of the bigger downtrend and the bear market. This makes the long side untradable.

Small-caps are holding up a little better the last three weeks, but this is not a big deal. While SPY and QQQ forged lower lows in May, the  S&P SmallCap 600 SPDR (IJR) and Russell 2000 ETF (IWM) remain above their early May lows. This is not a big deal because IJR and IWM are in downtrends overall and they broke down before large-caps. The higher lows show some short-term relative strength in small-caps, but this also implies relative weakness in large-caps, which is a big deal. Large-cap stocks are the main drivers for the broad market indexes and relative weakness in these stocks is weighing.

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

Energy and Agriculture Lead

The Energy SPDR (XLE) is the strongest sector SPDR and the strongest stock-based ETF on the Trend Signal and Ranking Table. The Trend Composite turned bullish 163 days ago (30-Sept) and the ETF is up 61% since this signal. RYE, CRAK, DBC and DBE are also at the top of the ranking table. The rankings are based on the StochClose (125,5) value (third column). ETFs related to agriculture are right behind to round out the top 11 (WEAT, CORN, SOYB, CANE, DBA).

There were two new uptrend signals: the Latin America 40 ETF (ILF) and the Agribusiness ETF (MOO). These two could be related to strength in agriculture. Brazil is the biggest player in South America, the largest sugar cane producer in the world and the second largest soybean producer. On the downside, there were bearish signals in ETFs related to the Consumer Staples sector (XLP, PBJ and SPLV). These could also be victims of food price inflation and shortages.

Here is a link to a podcast from Patrick Boyle on the coming food catastrophe.

New High and Leading

XLE (plus $WTIC)

West Texas Intermediate ($WTIC) remains one of the strongest commodities overall as it held its May breakout and actually advanced from mid April to mid May. In contrast, stocks and industrials metals fell sharply during this same period. I remain focused on the larger wedge and the early May breakout. Even though follow through may seem tepid, the larger wedge is a bullish continuation pattern and the breakout is largely holding. As such, I expect the uptrend to continue because of this breakout. The second chart shows DBE hitting a new high in early May and then forming a small pennant, which is a short-term bullish continuation pattern.

The next chart shows XLE with a big breakout in early 2022 and a zigzag higher since February (green dashed lines). There is no setup here, just a leading uptrend.

Short-term Pullback/Correction after New High


The other energy-related ETFs are not as strong as XLE, but they all have short-term bullish continuation patterns working and breakouts in progress. The first chart shows the Small-cap Energy ETF (PSCE) with a new high and falling flag from mid April to mid May. This is the pullback that relieves overbought conditions and paves the way for the next leg higher.

The next chart shows the Oil & Gas Equipment & Services ETF (XES) surging 81% and then falling back to the prior breakout zone with a 50% retracement. Also note that XES became oversold on May 9th as the Momentum Composite dipped to -3. We do not always get an oversold reading on a pullback, but this reading coincided with a support test, a normal retracement and a bullish continuation pattern. Keep this bullish trifecta in mind for the future.

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 Natural Gas ETF (FCG) is stronger than the two above because it formed more of a triangle. Regardless of the shape, these patterns represent a rest after a strong move, which makes them bullish continuation patterns. FCG did not become oversold because there was not much of a pullback. The ETF is making a breakout attempt to continue the bigger uptrend.

Short-term Pullback and Breakout in May


The agriculture-related ETFs remain strong as they broke out of short-term bullish continuation patterns in May. The DB Agriculture ETF (DBA) became oversold as the Momentum Composite dipped to -5 on May 9th and StochRSI popped above .80 two days later (red/green arrows). The ETF also broke out of the falling flag.

The next chart shows the Wheat ETF (WEAT) breaking out of a small wedge on May 5th and hitting a new high last week. There is no setup right now, just a strong and leading uptrend.  

The Sugar ETF (CANE) hit a new high in April, fell back to the prior breakout zone with a normal retracement (50-67%) and broke out on May 13th. The Trend Composite turned bullish on March 8th and this was a classic tradable pullback within a bigger uptrend.

Short-term Pullback/Correction after New High


Defensive groups, such as Consumer Staples and Utilities,  were holding up best in mid May. Consumer Staples ETFs were then hit hard last week and this leaves the Utilities SPDR (XLU) and the Select Dividend ETF (DVY) holding up. The bear is widening its grip. XLU and DVY remain in uptrends overall, but they were hit hard in late April and consolidated the last few weeks. The declines in late April started from new highs and the retracement amounts were normal (50-67% of the prior advance). This means the pullbacks could be mere corrections within the bigger uptrend. There is, however, one big problem. We are in a bear market and bearish outcomes are more likely in bear markets. As such, I am concerned that the consolidations over the last few weeks are short-term bearish continuation patterns. A break below the May lows would argue for further weakness in these two defensive names.

Uptrends with Deep Pullbacks


ETFs related to industrial metals, materials and steel are still holding their uptrends. These include the DB Base Metals ETF (DBB), EW Materials ETF (RTM), Metals & Mining SPDR (XME) and Steel ETF (SLX). Even though these ETFs are holding up still, I am concerned because we are in a bear market and this does not bode well for the economic outlook (demand). The first chart shows DBB holding just above its December low after an 18% decline. The Trend Composite also held positive. DBB reversed the downswing with a short-term breakout last week and this breakout is bullish until proven otherwise. Chartists can consider an ATR Trailing Stop. The short squiggly red line shows a 3 ATR(22) trailing stop, which is currently at 21.56. This is 3 ATR(22) values below the highest close since the breakout. Also note that DBB was featured with this short-term setup last Tuesday.

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

The EW Materials ETF (RTM) is in a choppy uptrend with higher highs and higher lows since last summer. RTM hit a new high around April 20th and fell back to the lower end of the rising channel here in May. This is a very choppy uptrend because RTM is below its highs from six months ago (November). Even so, the April-May decline is viewed as a correction within a bigger uptrend and I am watching for a breakout.

The Metals & Mining SPDR (XME) fell sharply from mid April to early May, but the decline is still a normal retracement (67%) and price returned to the breakout zone (broken resistance turns support). A steep falling channel formed and XME is breaking out of this channel. It is still a risky trade because of the bear market environment. The short red line shows the ATR Trailing Stop (2 x ATR(22)) at 47.70 for reference.

Did not Break January-March Lows


ETFs in this next group are not in uptrends really, but they are holding up better than the broader market because they did not break their January-March lows. The first chart shows the Materials SPDR (XLB) with a trading range over the past year and the ETF is at support. XLB is making a breakout attempt, but the concern here is that the firming at support is a bearish continuation pattern (pennant). I will give the upside breakout the benefit of the doubt until it is proven otherwise. A break below last week’s low would negate the breakout attempt and argue for a move to new lows.

The Healthcare SPDR (XLV) is also going for a short-term breakout with bounces the last two weeks. As with all breakouts, it is valid until proven otherwise and we need to pick our spot to prove the breakout wrong. A small rising wedge could be forming and a break below last week’s low would negate this breakout. It would also signal a continuation lower and argue for a break to new lows.

The Agribusiness ETF (MOO) is pretty much in the same boat as it bounces off support and reverses the short-term downswing.  Last week’s low holds the key and a break here would negate the short-term breakout.

Held December-January Lows and Short-term Breakout


The Gold SPDR (GLD) starts analysis of the metals ETFs, many of which have uptrends working on the charts and short-term breakouts. The systemtically oriented Trend Composite does not always jibe with what we may subjectively see on the price chart. This often happens when there is a big move in a short period of time. GLD fell 10% in less than five weeks, but held above the January lows. There is also a wide rising channel working with higher lows extending back a year. Thus, this could just be a big overshoot on the downside. GLD started bouncing last week and broke out with a gain on Monday. The short squiggly red line shows the ATR Trailing Stop (2 x ATR(22)) at 168.53 for reference.

Bounce off Range Support


The Copper ETF (CPER) was featured last Thursday and we are seeing a short-term breakout within a bigger trading range. The Trend Composite produced a great bull-bear signal from late June 2020 to mid August 2021 and then moved into whipsaw mode (losses). Whipsaws happen. Focusing on just the line chart, we can see a massive move followed by a long consolidation. CPER fell to consolidation support in mid May and bounced the last eight days for a short-term breakout. Thus, the downswing within the consolidation reversed and CPER is at least short-term bullish. A close below 25 would argue for a re-evaluation.

Note that Adam Rozencwajg was featured on the Global Macro series at Top Traders Unplugged, which is one of my favorite podcasts. This episode dives into ESG policies, climate-green versus nature-green energy, copper and more.

Held January Low, but No Short-term Breakout


The Palladium ETF (PALL) remains with a massive 100% advance and a less massive 42% decline. These are huge moves, but, taken together, it still looks like a bullish sequence: big advance and a big correction that overshot the normal retracements. We saw a lot of “overshoots” in late April and early May. Admittedly, labelling it an overshoot is subjective because the overshoot reflects strong selling pressure and this is negative. Even so, the sequence on the chart shows bullish potential because price is still well above the 2021 low and a falling wedge is typical for a correction after a big move. A wedge breakout would reverse the March-May decline.   

Tech-Related ETFs Show Short-term Relative Strength


The tech-related ETFs are in downtrends overall and not even close to reversing these downtrends. Even so, some are showing short-term strength over the last two weeks. SPY and QQQ dipped to new lows from May 12th to 20th. The Semiconductor ETF (SOXX) and Software ETF (IGV) held above their May 12th lows, while the Mobile Payments ETF (IPAY) did not even dip. This is “interesting” and could lead to an oversold bounce. At this stage, I am prepared to let the first big bounce go because the onus is on the bulls to prove the bears (downtrend) wrong. I would prefer to see a trend-changing event and then wait for a tradable pullback after a strong advance.

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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