Market and ETF Report – Volatility Remains High, Techs Continue to Lead Low, Some Commodity ETFs Setting Up (Premium)

Market volatility was also high and seemed to get even higher the last two weeks. Moreover, volatility and selling pressure are not just in the stock market. We saw selling pressure in almost all groups over the last five weeks. ETFs related to energy, agriculture and the Dollar bucked the selling pressure. Today’s report will show how hard it can be to trade oversold bounces when the bigger trend is down. We will then update some commodity-related ETFs that are still in uptrends and have bullish setups working. And finally, there are some stock related ETFs in uptrends with oversold conditions.

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.


Normal scheduling will resume on Tuesday,
May 10th with a report posted before 9AM ET.

Long-term Downtrend, Short-term Downswing with Resistance

Volatility remains high as the S&P 500 SPDR (SPY) experienced five daily price swings between two and four percent over the last eight days. The last two were a 3% surge on Wednesday and a 3.5% decline on Thursday. These seriously big daily swings confirm that risk levels are above average – but we already knew that.

On the price chart, SPY hit resistance at 430 twice in as many weeks and this is the level to watch for a short-term breakout, which would reverse the downswing within the bigger downtrend. The red dotted lines define the bigger downtrend with a falling channel that covers 2022.

While a breakout at 430 would be short-term bullish, traders wishing to play such a breakout would need to consider recent volatility. This means watching the market closely and trailing a stop or using a wide stop to prevent a premature exit based on volatility. This is clearly not the ideal setup.  

I am not interested in short-term bullish breakouts because the bigger trend is down and we are in a bear market. Even though bear market bounces can be sharp, short-term upswings are against the bigger downtrend and fighting a bearish headwind. This goes for all of the major index ETFs and most sector or industry group ETFs.

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

Going to Take a While

We need a trend changing event, a major upside breakout and/or a positive turn in the Composite Breadth Model to trade the long side for most stock-related ETFs. As far as short-term bullish setups within a bigger uptrend, we would need to wait for the trend-changing event and then look for tradable pullbacks. This will not happen overnight or in a few days. Truth be told, I do not know how long it will take or when it will happen. We are simply in a bear market until its is proven otherwise.

Consolidations and Ranges After Sharp Declines

West Texas Intermediate ($WTIC) has gone sideways since the parabolic surge above 120 and drop to the low 90s in the first half of March. Prices have simply moved sideways as oil consolidates within an uptrend. A consolidation within an uptrend is considered a bullish continuation pattern and this means a breakout is expected, and possibly underway. There are two smaller wedges within the larger wedge and both of these short-term breakouts are holding.

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

New Lows in Several Tech-Related ETFs

The Cloud Computing ETF (SKYY), Cyber Security ETF (HACK), FinTech ETF (FINX), Internet ETF (FDN) and Software ETF (IGV) were hit hard and recorded new lows. These are the high-beta ETFs that represent the “growth” trade and risk appetite in the stock market. New lows confirm a risk-off environment where investors are shunning risk. The PerfChart below shows eight tech-related ETFs and they are all down more than 12% over the last five weeks. For reference, SPY is down 8.4% and IWM is down 9.5%. These tech-related ETFs are down more and continue to lead lower.

The chart below shows SKYY with a 20% decline from early April to early May, and new lows in early May. The long-term trend is clearly down, but the ETF is quite oversold after this decline. This argues for an oversold bounce at some point, but we have yet to see a breakout or follow through move. A break above 79 would reverse the short-term slide and argue for an oversold bounce. However, a lot more work is needed to reverse the bigger downtrend. This is what I mean when I say that it will take time to reverse the downtrends out there.

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

Trading Against the Trend is Difficult

The next chart shows the Semiconductor ETF (SOXX) with four short-term breakouts during the 2022 downtrend. The red dotted lines define the downtrend and the short solid lines mark short-term resistance levels that were broken in early February, mid March, mid April and early May. Three of the four breakouts failed (yellow circles). The mid March breakout was the only success because of the extraordinary follow through. Strong follow through is required to successfully trade breakouts that are in the opposite direction of the bigger trend. As you can see, the failure rate is high because strong follow through is the exception, not the norm.

The next chart shows the Software ETF (IGV) with StochRSI(10) in the first indicator window and the Momentum Composite in the lower window. The short green arrows show when Momo Comp dips to -3 or lower (oversold), while the long blue arrows show when there is a subsequent StochRSI pop above .80. It is important to wait for some sort of uptick because ETFs can become oversold and remain oversold, as IGV did in January.

The signal in early October worked out well, but IGV was still in a long-term uptrend at the time. The signals since then have been mixed, at best. Currently, IGV became oversold in late April and there was a StochRSI pop on 28-Apr. IGV hit a new low on Thursday so this signal failed. A break above Wednesday’s high would reverse the downswing and call for a counter-trend bounce

Metals and Copper ETFs Establish Short-term Resistance

Timing a short-term bounce can also be a challenge when the bigger trend is up. The chart below shows the DB Base Metals ETF (DBB) becoming oversold on April 25th and remaining oversold as prices fell to the 23.20 area (green arrows). The long-term trend is up because the Trend Composite (not shown) is positive and DBB is trading in a potential reversal zone because it retraced 50 to 67% of the prior advance. With Wednesday’s surge and Thursday’s plunge, we have a short-term resistance level to watch for a breakout (red line). Chartists can also watch for a StochRSI pop above .80 to signal a short-term momentum thrust, which can sometimes jump start a reversal.  

The next chart shows the Copper ETF (CPER) with a sharp decline the last three weeks and the ETF staying oversold for two weeks. The plunge is quite drastic, but I can make the case for a wide rising channel (uptrend) with the dashed green trendlines. Moreover, CPER is near the lower line and very oversold. A hammer formed four day’s ago and we saw follow through with a big surge on Wednesday, but the ETF fell back on Thursday and formed an inside day. I would call this a bullish harami that signals indecision and it could pave the way to a short-term reversal. A break above 26.50 would reverse the short-term downtrend. Chartists can also look for a StochRSI pop above .80 for a short-term momentum thrust.

GLD Hits Potential Reversal Zone

The Gold SPDR (GLD) remains in an uptrend overall and the ETF is in a potential reversal zone after a pullback the last two months. I consider this a potential reversal zone for four reasons. First, the long-term trend is up and GLD hit a new high in early March. Second, the decline over the last two months formed a falling wedge and this is typical for corrections within a bigger trading range. Third, the decline retraced around 2/3 of the prior advance and this is also normal for a correction within a bigger uptrend. And finally, the decline returned to the breakout zone. The pieces are there for a reversal zone and GLD became oversold four days ago. The swing within the big falling wedge is down and a break above Thursday’s high would reverse this downswing. Also note that a StochRSI pop above .80 would show a short-term momentum thrust.

The next chart shows the Silver ETF (SLV) with StochRSI and the Momentum Composite. The green arrows show when the Momo Comp becomes oversold and the blue arrows show when StochRSI pops above .80. Notice that SLV has been oversold for around two weeks now (cluster of green arrows). We have yet to see a StochRSI pop to signal any kind of short-term upturn. A break above Thursday’s high or a StochRSI pop would be short-term bullish.

Three Stock Related ETFs with Wide Ranging Uptrends

There are a few stock-related ETFs that are still in uptrends of some sort and short-term oversold. I featured a few on Tuesday and will add three today. Stock-related ETFs, even seemingly defensive ETFs, carry above average risk because we are in a bear market. However, we have also seen that non-stock commodity ETFs are also risky because of general market volatility. It is tough all around.

Prior Report

Tuesday’s Report (here) covered the following:

  • Just how broad-based was the selling pressure?
  • SPY and QQQ are Short-term oversold, but Long-term Bearish
  • Oil and Ag Leading Industrial and Precious Metals
  • Oil Remains within Bullish Continuation Pattern ($WTIC, DBE)
  • DB Agriculture ETF Corrects (DBA and WEAT, CANE, JO)
  • Energy-related ETFs Hold Up (XLE, XES, FCG)
  • Industrial Metals Plunge and Test Resolve (DBB, CPER, COPX)
  • Palladium ETF Holds Support Zone (PALL)
  • Uranium Returns to Breakout and Firms (URA)
  • Gold Remains within Big Wedge Correction (GLD)
  • All Sectors Participating in the Bear Market
  • Stock-Related ETFs with Uptrends and Pullbacks (PBJ, MOO, XME, XLB)

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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