Mkt/ETF Commentary – Short-term Volatility is a Challenge, but it Does not Change Existing Trends (Premium)

It is important to remember that the major trends in play right now were in place before Russia invaded Ukraine. High-flying tech stocks were out of favor late last year and remain out of favor. Weakness spread as the Market Regime turned bearish in mid February and remains bearish.

Commodities were in uptrends with many getting short-term breakout signals in December (DBE, DBB). The DB Agriculture ETF (DBA) was in an uptrend and broke out of a consolidation in January.  The Russian invasion of Ukraine increased volatility and led to some parabolic advances, and prices fell back quite sharply the last one to two weeks. This is what happens to parabolic moves. The short-term trends are a mess, but the long-term trends were and remain bullish.

We need to be very careful with the news and the fog of war. The west wants to wean itself from Russian energy, but other countries may want to buy Russian oil at discounted prices. Supply will find a way when there is demand and a profit to be made. This could also apply to other commodities. The west is sanctioning Russian businesses and pulling out, but others may pick up the slack. Here is an interesting take from Alex Turnbull on Substack.

The Market Regime remains bearish and this is negative for most stocks and stock-related ETFs. Bear market environments argue for higher levels of cash (capital preservation) and smaller positions. There are alternatives to stocks, but bonds are in a bear market as well. Volatility is through the roof for commodities and this also argues for smaller positions.

We are in the fog of war and what you know/think is probably wrong. --Mike McKee (Bloomberg)

QQQ Leads Market Lower as IJR Forms Pennant

SPY broke down in January and then bounced twice with failures in the 460 and 440 areas (red lines). The decline looks like a falling wedge, which is typically a corrective pattern within a bigger uptrend. However, the bigger trend is down and I do not view this as a corrective pattern. Instead, the 2022 decline is part of the bigger downtrend. We may see some sharp bounces (4-6%) because volatility is high, but I would not consider turning bullish until we see convincing breakout and an improvement in breadth.

QQQ is leading the market lower as the ETF exceeded its February low with a 1.9% decline on Monday. The only positive is that QQQ is short-term oversold after an 8.4% decline in eight days. This could pave the way for an oversold bounce, but the medium and long-term picture is bearish.

Note that 78 stocks from the Nasdaq 100 are also in the S&P 500 and these stocks account for some 35% of the S&P 500. These include AAPL, MSFT, GOOGL, AMZN, TSLA, NVDA and FB. Weakness in QQQ is weighing on the broader market. QQQ also represents the tech sector and the risk end of the stock market. Downside leadership in QQQ is negative for techs in general and points to a risk off environment for stocks.

Small-caps also represent a riskier end of the stock market, but they are holding up better than large-caps right now. Even so, we are in a bear market environment (see Market Regime page) and I do not expect small-caps to hold up. The chart below shows the S&P SmallCap 600 SPDR (IJR) with a bearish pennant taking shape and the ETF is poised to break support. Note that I am not a fan of short positions in stocks because counter-trend bounces tend to be swift and sharp.

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

Bonds Plunge as 10-yr Treasury Yield Surges

In last Tuesday’s commentary, I focused on the 10-yr Treasury Yield for analysis of the Treasury bond market. Yields and bonds move in opposite directions so a bullish setup in the 10yr Yield implies a bearish setup in TLT or IEF. Also note that the 10-yr Treasury Yield is perhaps the most important spot on the yield curve. The chart below shows the yield with a big breakout in January and new highs into February. There was a hard throwback into early March, but broken resistance turned support and held. This throwback also retraced 50%. Keep this setup in mind for the future: big breakout, throwback to the breakout zone and a 33-67% retracement. The 10-yr Treasury Yield surged above 2% and to a new high the last few days.

Oil and DB Energy ETF Correct

Oil fell back to the $100 level on Monday and is trading in the mid 90s as I write. Note that oil surged from 90 to 130 just before it fell back to the mid 90s. The long-term trend was up before the pop-drop and remains up, but volatility is through the roof. The chart below shows the DB Energy ETF (DBE) retracing 33-50 percent of the prior surge with a decline back to the 21-22 area. Timing support or oversold bounces is an even bigger challenge given the recent volatility, but the 21 area looks like a area that could mark support. The indicator window shows the a 20-day SMA of the High-Low Range (%). The average daily range over the last 20 days has been above 3% the last four days. This indicator does not have any directional value, but it does quantify volatility in the oil market and it is the highest in over a year. I do not like volatile markets and usually just stay away.

Note that High-Low Range Percent is part of the TIP Indicator Edge Plugin for StockCharts ACP. The chart below shows the example with DBE.

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

Energy ETFs Stall

The energy-related ETFs remain the leaders, but even the leaders need a rest as they pulled back the last few days. I do not see a setup on the charts, just strong uptrends and very short pullbacks within these uptrends. The chart below shows XLE with a flag breakout in route to a 55% gain. Chartists can use broken resistance levels, prior consolidations and retracements to guestimate pullback support. A 33% retracement and return to the flag highs point to first support around 70-71. This is the first area I would watch for a bounce.

The next chart shows the Oil & Gas Equipment & Services ETF (XES) surging some 75% and breaking out to new highs in March. This is long-term bullish, but the ETF was quite extended after this big move. The blue shading marks a possible support zone in the 63-64 area from broken resistance and a 50% retracement. My gut tells me that a pullback may not get this far though. Note that  XES is a very volatile ETF with an average daily high-low range above 4% for most of the last seven weeks (red bars on indicator).

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

Gold, Silver and Base Metals Correct

Almost all commodity-related ETFs are going through extraordinary volatility. There were also in uptrends when the year began and remain in uptrends. The chart below shows the Gold SPDR (GLD) with a 16% surge and the a 4.8% decline the last four days. I still think last week’s island reversal is just noise and not a tradable pattern. And, I still think the long-term trend is up and we should be focused on bullish setups, not bearish setups. I do not see a bullish setup on the chart right now and can only estimate the next support zone – or rather guesstimate. Yes, this is VERY subjective stuff. The 50% retracement is around 180 and broken resistance from the May high is around 178-179. Thus, I would estimate support in the 178-180 area.

The Silver ETF (SLV) remains bullish overall with the Trend Composite positive and a break above the November high. Even though SLV fell back below the breakout zone, I would not call this a failed breakout. SLV was overbought after a 22% advance and ripe for a pullback or consolidation. Using broken resistance and the 50% retracement, I would guesstimate short-term support in the 22.5 area (blue shading).

Estimating support for the DB Base Metals ETF (DBB) is an even bigger challenge because it has three volatile components: aluminum, zinc and copper. DBB surged some 31% and then fell around 10% the last six days. The 50% retracement line and broken resistance combine to mark support in the 24 area, which is very close right now. Keep in mind that there can be overshoots when volatility is high. The indicator window shows that the 20-day average of the high-low range (%) has been above 1.5% the last four days.

The Copper ETF (CPER) remains all over the place, but in a choppy uptrend the last few months. The ETF surged 9% in four days to reach 30 and then fell 8.3% the last six days. Even though the Momentum Composite (not shown) is at zero and not yet oversold, copper is clearly oversold after an 8.3% decline in six days. The challenge here is that volatility is high and this decline is a short-term falling knife. There is a lot of price congestion in the 27 area from mid December to mid February and I would also consider this area as support (green zone).  

Three Themes at Work

There are some new themes at work in the markets over the last few weeks and one of them is an increase in defense spending in the coming weeks, months and years. Other themes include a push away from fossil fuels from Russia, a push towards alternative energy, continuing demand for cybersecurity and de-globalization. The latter could be a headwind for China in the coming years.

ITA, PPA and XAR are the three defense ETFs. My focus remains on ITA as the Trend Composite turned positive in late February and the ETF broke out in early March. ITA fell back below the breakout, but I do not consider this a “failed” breakout. ITA was up around 15% from its late January low and ripe for a pullback. Stock market volatility is also above average and affecting most stocks. The two week decline formed a falling wedge and retraced around half of the 15% surge. A short-term setup is in the making and a break above 107 would reverse the short-term pullback.   

The Cybersecurity ETF (CIBR) is holding up the best of the tech-related ETFs, but it too is down sharply since November and down 8.5% the last five days. This eight day decline retraced around 67% of the surge from 44 to 51. I am not showing the retracement lines because I do not want to clutter the chart. The decline looks like a falling flag, but the declines within the flag are steep, which is not typical for a falling flag. A falling flag is a correction after a sharp advance and the pullback should be more controlled. However, volatility is above average across the board and nothing is in control. At the very least, a flag breakout is needed to reverse this short-term fall.

The clean-energy ETFs were hit hard because most have high multiples and high growth rates, both of which are out of fashion right now. Clean energy has a renewed secular theme in play, but secular themes are long and we can always see short-term volatility along the way.  The chart below shows the Clean Energy ETF (PBW) breaking out and then falling back sharply over the last two days. PBW and the other clean-energy ETFs are still above their January-February lows and holding up better than related ETFs, such as the ARK ETFs.

Bear Market Charts

The parade of ugliness continues within the stock market. Note that the EW Consumer Discretionary ETF (RCD) and Retail SPDR (XRT) hit 52-week lows last week. The chart below shows RCD breaking down on January 20th, weeks before the Russian invasion and the surge in oil. RCD and XRT are tied to consumer spending and new lows bode ill for the economic outlook. Also note that the Online Retail (IBUY) hit a 52-week low on Monday and the Home Construction ETF (ITB) its summer lows in late February.

Even though small-caps are holding up better than large-caps, but the Russell 2000 Growth ETF (IWO) is not as it hit a 52-week low this week. Small-cap value shows relative strength because it is going down less, but the Russell 2000 Value ETF (IWN) is not in an uptrend either. Owning value usually means you will just lose less in a bear market.

Tech-related ETFs took it on the chin again with fresh 52-week lows in the Cloud Computing ETF (SKYY), FinTech ETF (FINX), Internet ETF (FDN) and Software ETF (IGV). These ETFs and some of their components may represent long-term opportunities, but the trends are down and high-flying tech is out of favor. I think we need some sort of selling climax and/or basing process before considering a bottom.

Also note that the three auto-related ETFs recorded new lows on Monday. These include the Autonomous EV ETF (DRIV), Self-Driving EV Tech ETF (IDRV) and Global Auto ETF (CARZ).

Semiconductors were holding up better than the tech ETFs above, but the Semiconductor ETF (SOXX) has not been able to reverse its January breakdown. Tech stocks are out of favor and SOXX is part of this sector. The chart shows SOXX finding support near the August-October lows and breaking support the last two weeks.

Last Thursday's Report Covered the Following

  • Link to Thursday’s Commentary
  • Volatility and Bear Markets
  • Short and Sharp Surges
  • AD%: Daily Readings vs 10-day EMA
  • Bearish Pattern in S&P SmallCap 600 SPDR 
  • Food & Beverage ETF not Immune
  • Utilities SPDR Hits New Highs
  • Agribusiness ETF in Uptrend
  • Infrastructure ETF in Uptrend
  • DB Base Metals ETF Oversold
  • DB Energy ETF Oversold
  • DB Agriculture ETF Oversold
  • Learning What to Ignore: Gold SPDR

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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