This Week's Publishing Schedule
This week’s commentary schedule will be a bit different because I go in for a non-invasive procedure on Wednesday (12-Jan). My overall health is good, but DNA and age (59 years) are calling. The procedure, which is quite common, is a Holmium Laser Enucleation of the Prostate (HoLEP). I will go under a general anesthesia and should spend one or two nights in the hospital.
This Week’s Schedule:
Monday, 10 January: Strategy Article/Video
Tuesday, 11 January: Market/ETF Commentary and Video
Saturday, 15 January: Weekend Video? (depending on recovery)
Normalization Can be Painful
The transition process is difficult and the markets are undergoing a transition from a covid-driven economy to a normal economy. A covid economy implies Fed easing, fiscal stimulus and falling Treasury yields. A normal economy means no more balance sheet expansion, no more fiscal stimulus and a normalization of Treasury yields.
Money started moving out of the extreme high flyers in spring 2021 as the ARK Innovation ETF (ARKK) and Global Clean Energy ETF (ICLN) fell some 35% from their January-February highs to their May lows.
Money started moving into the old economy groups in late September as the Regional Bank ETF (KRE), Energy SPDR (XLE), Materials SPDR (XLB) and Infrastructure ETF (IFRA) produced double digit advances.
Money then moved out of tech-related ETFs in December as the Software ETF (IGV), Cloud Computing ETF (SKYY) and Internet ETF (FDN) broke their October lows. These three continued lower in January and broke their December lows. Meanwhile, the bank and energy related ETFs continued higher and hit new highs.
I do not know how long the transition will last, but the rotations within the market are clear. Tech and high beta are out. Boring and value are in.
Transition phases can be difficult for trading because it usually involves an increase in volatility. We can see this with the widening swings in SPY, QQQ, IHF, IHI and some other ETFs. There are some hard throwbacks on the price charts, but I am not seeing man controlled pullbacks, oversold conditions and my preferred setups. Traders can mute an increase in volatility by trading less, trading smaller positions and/or widening stops.
10-yr Treasury Yield Breaks Out
The 20+ Yr Treasury Bond ETF (TLT) fell around 8% the last six weeks and broke wedge support. The ETF is short-term oversold after such a sharp decline, but the wedge break reversed the March-December uptrend and signaled a continuation of the prior decline (-23%). This targets a move below the March low (eventually).
The 10-yr Treasury Yield broke out of a large triangle and this ends the long correction after the prior advance (1.5 to 1.75 percent). The 10-yr Yield is already challenging the spring highs and I would expect a move to 2%. As with TLT, $TNX is a bit extended short-term and we could see a pullback or stall to digest this big move.
Swings Widen in SPY
Despite a failed breakout last week, SPY remains in a consistent and persistent uptrend. The ETF surged to a new high in November, consolidated with a triangle into December and broke out to a new high in late December. This breakout did not hold as the ETF fell sharply the last four days. Even so, SPY is above the December lows and the ETF recorded a 52-week high in late December. The trend is still up, but volatility is increasing as the swings widen.
The S&P 500 has not touched its 200-day SMA since June 2020 (388 days). This is the fifth longest stretch since 1990. This is just an observation, not a tradable insight. Yes, it has been a long time, but how long is a piece of string? Frankly, I would welcome a test of the 200-day SMA because it would likely set up a decent buying opportunity. Mr Market, however, does not usually listen to me.
QQQ Turns Choppy
QQQ also remains in a long-term uptrend and turned choppy the last seven weeks. The uptick in volatility and widening of the price swings means I am not seeing trading setups that fit my criteria. Volatility is not my friend because I prefer orderly pullbacks that become oversold and form tradable patterns. QQQ is correcting with a choppy decline since late November. This correction has so far retraced 50-67% with a fat flag like pattern. Perhaps it is a consolidation within an uptrend and a bullish continuation pattern, but it is not my type of setup so I will wait for the dust to settle.
The Water Resources ETF (PHO) has a chart similar to QQQ. There is a consistent uptrend present, but the recent breakout failed to hold and the ETF is back near the December lows. PHO is also short-term oversold as the Momentum Composite hit -3 and price is near the 67% retracement.
S&P 500 EW ETF Chugs Higher
The S&P MidCap 400 SPDR (MDY) is below its April high and the Russell 2000 ETF (IWM) is near the March low. As such, these two have gone nowhere since spring 2021 and their trends are hardly consistent. The S&P 500 EW ETF (RSP), in contrast recorded higher highs in May, August, November and late December. The rising channel defines this advance (green lines). The uptrend is consistent with higher highs and higher lows on a regular basis, but it is still quite choppy.
You can learn more about my chart strategy in this article covering the different timeframes, chart settings, StochClose, RSI and StochRSI.
Banks and Energy Extend on Breakouts
The Banking ETFs (KRE, KBE) and Energy ETFs (XLE, XOP, FCG) sport similar patterns and conditions. Both hit new highs in November, corrected with falling channel/flags into December and broke out in late December. They extended on this breakouts with XLE and KRE hitting new highs this week. On a closing basis, KRE and XLE are up around 15% since December 20th. They are short-term extended but by no means week.
Now is time to manage the position and this depends on your timeframe. Long-term trend traders can wait for a bearish trend signal to exit. Short-term traders can consider a profit target and/or a trailing stop. Short-term, there is nothing wrong with taking profits on part of a position to lock in gains and get a free ride. For example, close half and set a stop loss on the remainder so the entire trade would be break even. The red line shows the ATR Trailing Stop, which is five ATR(22) values below the highest close since the breakout. I chose five as the multiplier because this sets the initial stop just below the lowest close of the pattern. It is wide enough to absorb some volatility and will trail should prices continued higher.
You can learn more about exit strategies in this post,
which includes a video and charting options for everyone.
WTI Maintains Uptrend and Upswing
West Texas Intermediate ($WTIC) and the DB Energy ETF (DBE) remain in slow uptrends since March. The green line connects the lows since March and the slope is positive, but not 45 degrees positive. Nevertheless, there is an uptrend present with higher lows and higher highs since March. WTI and DBE broke out on December 23rd and extended after these short-term breakouts.
IFRA and XLB Hold Breakouts
There is not much change for the Infrastructure ETF (IFRA) and Materials SPDR (XLB). Both broke out of long corrections, hit new highs and broke out of triangle consolidations. Overall, they remain in choppy uptrends. These two are leading the market since early December because they hit new highs in late December. IFRA is up 6.7% since December and XLB is up 5.5%.
Electric Vehicle ETFs Hold Up
The Global Auto ETF (CARZ) and Autonomous EV ETF (DRIV) remain in consistent and choppy uptrends with higher highs and higher lows on a regular basis. Both pulled back after their November highs and broke out with surges in late December. They fell back with the rest of the market over the last few days, but the breakouts are holding overall.
XLV and ITB with Throwbacks to Breakout Zones
A trading strategy involves a definable and repeatable process that fits our trading style and preferences. We cannot copy another trader verbatim. Instead, we can learn from others and develop our own strategy. Personally, I look for tradable pullbacks within uptrends or after a strong impulse move. These pullbacks require a short-term oversold condition (Momo Comp at -3), a tradable pattern and a short-term bullish catalyst. XLV had such a setup in early December and broke out on December 7th (green arrow).
XLV surged to a new high with a 14% advance and then fell sharply the last seven days. The ETF formed an outside reversal on Monday and this is the same as a bullish engulfing. There is a short-term setup on this chart, but it does not fit my criteria. The throwback retraced 50% of the prior advance and returned to the breakout zone. The bullish engulfing is the first sign of a short-term bottom. This is not my preferred setup because I do not see a short-term oversold condition or a tradable pattern (falling flag/wedge or triangle).
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.
IHF Gets Hard Throwback after New High
The Healthcare Providers ETF (IHF) is in an uptrend that seems to get more and more volatile. The ETF recorded 52-week highs in January, March, April and May. It then embarked on a 105 day “pullback” and surged to a 52-week high after breaking “support” in September. Support and resistance levels are sometimes useless when it comes to ETFs and indexes.
The ETF now sports a volatile zigzag higher since October and hit a potential reversal zone on the current pullback. Note that the January plunge retraced 2/3 of the prior surge, IHF became oversold and the ETF formed an outside reversal on Monday. Again, this is a short-term bullish setup, but it does not fit my preferred criteria.
IHI Breakout Fails as ETF Falls to December Lows
In addition to my basic pullback strategy, I also look to time the swings within a bigger bullish pattern. The chart above shows IHI forming a triangle consolidation after a 52-week high (blue dotted lines). The downswing into early December reversed with a gap breakout on December 7th (green arrow). IHI went on to break out of the bigger triangle – and then fail to hold the breakout. The ETF fell all the way back to the October-December lows and the uptrend is losing consistency. IHI is now is testing the prior lows and at a moment of truth. A break below these lows would put the ETF in the downtrend category (lower low).
CPER and COPX Hold Breakouts (plus DBB)
The Copper ETF (CPER) and Copper Miners ETF (COPX) are holding up rather well since December and seem to be part of this market rotation. There is no change in the charts. CPER broke out of the smaller wedge with a surge in late December and stalled after this breakout. The breakout is holding more or less and a close below the January lows would argue for a re-evaluation.
The DB Base Metals ETF (DBB) is equal parts copper, zinc and aluminum. The latter two are stronger than copper with steady advances since early November and this is why the DBB chart is stronger than CPER. DBB sports an uptrend overall with a new high in October and support zone around 20.5 (green). The short-term breakouts in December are holding for now as well. Note that you can easily chart zinc and aluminum in TradingView. Start typing zinc or aluminum on the chart and the symbol options will appear.
URA Continues to Firm in Key Retracement Zone
There is no change in the Uranium ETF (URA). It is at an interesting juncture because it hit a new high in November, fell back into December and firmed in the 50-67 percent retracement zone. I will err with the bulls because the long-term trend is still up. The ETF is firming near prior resistance and the Sep-Oct lows. A breakout at 26 would be bullish. Note that you can chart uranium futures on TradingView. Just start typing in uranium on the chart and choose from the options.
