Mkt/ETF Commentary – Volatility Remains, QQQ Bounces after Break, Energy and Defensive ETFs Lead, Metals and Ag Hold Up (Premium)

Small-caps were the talk of the town in mid November as they broke out of a seven month range and the skies opened up. Volatility then reared its ugly head in late November when the Russell 2000 ETF (IWM) fell some 12 percent from a new high. IWM continued lower in January and hit a 52-week low. The Russell 2000 Growth ETF (IWO) led the way as money fled high-beta stocks and ETFs.

Volatility extended to SPY and QQQ in January as both fell sharply and broke their December lows. Volatility and weakness expanded within the stock market. Stocks rebounded sharply the last four days, but the damage since late November has yet to be reversed. The Composite Breadth Model is going through whipsaws since early December, but the percentage of stocks above the 200-day SMA tells the real story. There are more downtrends than uptrends among stocks in the S&P 1500.

Even though there are some pockets of strength within the stock market and some stock-related ETFs with uptrends, the pickings are slim and risk remains above average. Stocks are still stocks and the broad market environment is still the single most important factor. This means even stock-related ETFs in uptrends could face headwinds.

CBM Continues to Flip

The Composite Breadth Model continues to flip between bullish and bearish signals. This time we can blame the S&P 500 and the violent bounce over the last few days. QQQ led the bounce with an 8.5% surge the last four days and SPY was up 6%. These big bounces pushed the 5-day SMA above the 200-day SMA for the S&P 500 and the percentage of S&P 500 stocks above the 200-day SMA exceeded 55% (bullish signal). This flipped the CBM bullish again. Volatility around the 200-day SMA is pretty normal as the bulls and bears slug is out for dominance. Sometimes the result is a volatile trading range.  

The chart below shows that more stocks are still below their 200-day SMA than above it. SPX %Above 200-day SMA is the only one of the four above 50% (56.75%). Less than 40% of S&P MidCap 400 and S&P SmallCap 600 stocks are above their 200-day SMAs. Less than 50% of Nasdaq 100 stocks are above their 200-day SMAs. This is clearly not a bull market environment that is lifting most stocks. At best, the market is mixed with a preference for large-cap non-tech stocks. Small-caps and mid-caps are still not an option.

Putting the Bounces into Perspective

The chart below shows SPY with a sharp decline in January that broke support and turned the Trend Composite negative. SPY was oversold after a 9.7% decline and bearish sentiment hit an extreme last week (see weekend video at the 11:45 mark). This bounce retraced around 67% of the prior decline and this is an area to expect some resistance. Overall, I view the 9.7% decline as an impulse move and have yet to see enough strength to override this assessment.

The next chart shows QQQ with a similar picture. QQQ fell some 17%, broke support and the Trend Composite turned negative in January. The ETF came roaring back the last four days and retraced around half of this decline. Is this enough to turn bullish again? Not for me. The Trend Composite is negative and I view the January decline as an impulse move. I have not seen enough strength to prove this bearish assessment otherwise.

The Trend Composite is part of the
TIP Indicator Edge Plugin for StockCharts ACP

There is a Lot to Ignore Right Now

Knowing what to ignore is an important part of trading or investing. As a trend-follower and one who looks for bullish continuation patterns within uptrends, I ignore downtrends because there is no sense fighting against the bigger force at work. Why pedal up hill with the wind in your face? There are some trading ranges or grinding uptrends that come across my radar, but ETFs in downtrends are off the table. This means tech-related ETFs, high-beta ETFs, clean energy ETFs, eGaming ETFs, cannabis ETFs, Electric Vehicle ETFs, Biotech ETFs, Retail ETFs, Semiconductor ETFs and more. In fact, there are more downtrends than uptrends right now and this means the focus list is relatively narrow. Groups with uptrends include energy, commodities, banks, insurance, utilities, consumer staples and some REITs. Trading range ETFs include XLB, XLI, ITB and XME.

New High in February and Leading


Oil remains the king of commodities and the energy-related ETFs are the market leaders right now. The chart below shows West Texas Intermediate ($WTIC) hitting another new high this week. Oil is up some 35% since early December and extended short-term, but this does not guarantee a pullback or consolidation. There is no setup on the chart, just a strong and leading uptrend. The bottom window shows the DB Energy ETF (DBE) with two breakouts in December and a move to new highs as well.

The Energy SPDR (XLE) is the leading sector, by far. The Trend Composite turned bullish on September 30th, a bullish continuation pattern formed into December and there was a breakout on January 3rd. XLE zoomed to new highs and is short-term extended, just like oil. There are no signs of weakness and there is no setup right now.

The Natural Gas ETF (FCG) and Oil & Gas Exploration & Production ETF (XOP) are not quite as strong as XLE, but they have similar setups working. The chart below shows FCG with a new high in November, a falling channel that retraced 50% into December and a breakout in late December. This is a quintessential bullish continuation pattern (pullback within uptrend). FCG hit a new high in mid January, dipped below 18 and then advanced to new highs this week.

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

New High in February


The DB Agriculture ETF (DBA) and some other agriculture-related ETFs are in uptrends and leading the market. The chart below shows a cutout from the Trend Signal and StochClose Ranking table. The DB Agriculture ETF (DBA), Coffee ETF (JO), Corn ETF (CORN) and Wheat ETF (WEAT) have been in uptrends for over a year (blue shading). The DB Agriculture ETF (DBA) is not the most exciting ETF out there, but it is better to have a slow and steady uptrend than any kind of downtrend.

The chart below shows DBA with the Trend Composite positive for over a year and a steady advance since the channel breakout in late July. There were two smaller bullish continuation patterns along the way. The triangle-wedge was the last setup with a breakout just before Christmas. Nothing else to see here, just a steady uptrend.

The Global Carbon ETF (KRBN) broke out of its triangle with a massive advance on Wednesday.

Uptrend and Strong 2022


The DB Base Metals ETF (DBB) is also a leader and stronger than the Copper ETF (CPER), thanks to Zinc and Aluminum. On the price chart, DBB has yet to record a new high, but the trend is up with the Trend Composite being positive for over a year. As with other commodity-related ETFs, DBB broke out in December and continued higher in 2022. There is no short-term setup, just a leading uptrend.

Choppy Uptrend and Held above December Low


The Copper Miners ETF (COPX) and Copper ETF (CPER) are not as strong as DBB, but they are in uptrends overall and held above their December lows during the January pullback. CPER is the more frustrating of the two because it dipped below the mid January low (green line) and then bounced the last two days. This looks like noise and an overshoot. It is also a lesson to not get too caught up in short-term noise when overall volatility is above average. The Trend Composite is at +1 and the December closing low is at 25.68. A close below the December closing low and/or a negative Trend Composite would be reason to turn bearish.

COPX has been in a choppy uptrend since autumn and the Trend Composite turned bullish on January 11th. After a surge in the second half of January, the ETF fell back and held the January lows (green line) with a bounce the last three days. This bounce affirms support in the 36 area and a break below 36 would call for a re-evaluation, especially if CPER breaks its December closing low.

The Gold SPDR (GLD) is pretty much in the same boat as copper. There is a choppy uptrend at work the last few months and the Trend Composite turned positive in mid November. Note that GLD has gone nowhere for a year and was trading in the 169 area back in November 2020. As with copper, the trend cup appears to be half full for now. Last week’s sharp pullback created a short-term oversold condition for price, but this was not registered by the Momentum Composite, which only hit -1. Sometimes we do not need an indicator to figure out that something is oversold. GLD fell 3% in three days and this is short-term oversold. The ETF got a bounce the last three days and looks to be in bull mode as long as the December lows hold.

New High in January and Normal Pullback


The three defensive ETFs (XLP, PBJ, XLU) and the Residential REIT ETF (REZ) hit new highs in January and the pullbacks into late January were pretty normal. They retraced a normal amount of the prior advance (50-67%) and held well above the December low. These ETFs are in uptrends and still leading. The first chart shows XLP with an 11% surge to new highs, a 50-67% retracement of this surge and a short-term oversold condition on January 25th (Momentum Composite at -3 or lower). The pullback looks normal and XLP bounced the last five days.

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.

The pullback in the Utilities SPDR (XLU) was perhaps the least normal because it fell back to the December lows. Even so, the decline retraced around 2/3 of the prior advance (Oct-Jan) and found support near the December lows. XLU was also short-term oversold last week and bounced the last five days.

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

New High in January and Normal Pullback


The Regional Bank ETF (KRE) and Bank SPDR (KBE) are also in uptrends and part of the leadership group. These two hit new highs in mid January and fell back rather hard in the second half of the month. These declines, however, retraced around 67% of the prior advance and they firmed the last two weeks. The chart below shows KRE firming around 70. The ETF bounced the last four days, but remains below last week’s high and is not as strong as ETFs that broke last week’s high (like XLP). I am also concerned that broad market weakness could weigh on banks at some point and the 10-yr Treasury Yield could also affect performance (see last section).

Choppy Uptrend and Held December Low


The Finance SPDR (XLF) and Insurance ETF (KIE) are in choppy uptrends and the Trend Composite is positive. The first chart shows XLF as the more stable of the two uptrends. Also note that the Trend Composite has been positive for over a year. XLF fell back pretty hard in the second half of January, but ultimately held the December low and bounced off uptrend support the last four days. The ETF even broke above last week’s high.

The next chart shows KIE with the Trend Composite whipsawing since September. Note that KIE is still below its May high, even though the price chart sports higher lows and a rising channel since July. It is just a very choppy affair. KIE held support from the December lows in January and surged above last week’s high with a four day pop.

Choppy Uptrend and Held October Low IFRA

The Infrastructure ETF (IFRA) chart is similar to the two above with a choppy uptrend and price still below the May high. IFRA did not hold the December low, but did managed to hold just above the October low and the Trend Composite remained positive. The ETF became oversold in the second half of January and surged above last week’s high with a pop the last four days. This keeps the choppy uptrend alive and affirms support at 35.

Surge off Support and Short-term Breakout XLV, IHF

Now we get to ETFs that are in trading ranges or bouncing off support zones. The first is the Healthcare SPDR (XLV), which hit a new high and then fell 11%. The ETF broke the December low and the Trend Composite turned negative so technically the trend is not up. A gander at the chart shows a lot of support in the 125 area from broken resistance and the October lows (blue shading). XLV was also oversold for a seven day stretch as the Momentum Composite hit -3 for five of seven days (19 to 27 January). The ETF ultimately held support last week and broke short-term resistance with a surge on Friday. This reverses the short-term downswing. The red line shows the ATR Trailing Stop set 3 ATR(22) values below the highest close since the breakout (127.19).

The next chart shows the Healthcare Providers ETF (IHF) with some very wide swings since October (+12%, -9%, +13% and -11%). Needless to say, the Trend Composite was whipsawed the last few months and is not much help here. Overall, the chart still sports higher highs and higher lows. The red arrows show when the Momentum Composite became oversold and the green arrows show when StochRSI subsequently popped above .80. The last two trades worked pretty good and the third one triggered with the surge on Friday. The red line shows the ATR Trailing Stop for reference (2 ATR(22) values below the highest close since the StochRSI pop).

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

Trading Range or Slight Uptrend


The Industrials SPDR (XLI), Materials SPDR (XLB), Metals & Mining SPDR (XME) and Home Construction ETF (ITB) have gone nowhere since May. XLB and ITB could have slight uptrends because they recorded new highs in December or January. XLI and XME are largely flat with long trading ranges. All four hit the low end of their ranges last week and bounced this week.

The charts below show red arrows for when they became oversold (setup) and green arrows when StochRSI subsequently popped above .80 for a short-term bullish thrust (signal). I am showing this combination because it is something to consider in a choppy or sideways environment. Go on alert when an ETF nears support and becomes oversold (Momentum Composite at -3 or lower). Then, watch for a StochRSI pop or short-term reversal of some sorts to trigger a bounce.

The ITB chart shows setups and signals in June-July and September-October. Notice that the ETF dipped below the low of the first setup-signal both times and the second StochRSI pop proved more robust. ITB became oversold from 7 to 27 January without a StochRSI pop in between. There was a pop above .80 on Monday as the ETF bounced near the October low.

The next chart shows XLB with setup-signal sequences in June, July, September, December and January. The June sequence failed as XLB dipped below the setup low. The December signal probably would have been a breakeven or small loss. There was some follow through after the July and September signals, but the only way to profit would have been with a profit target (5%).  Trailing a stop would have given back most, if not all, profit. This is the nature of trading the range. Take profits when modest and don’t get greedy when trend is absent.

TLT and 10-yr Treasury Yield Consolidate after Breaks

The 20+ Yr Treasury Bond ETF (TLT) broke down with a sharp decline from mid December to mid January. The ETF then consolidated with a triangle of sorts taking shape. A consolidation after a sharp decline is typically a bearish continuation pattern and a break below 141 would signal a continuation lower. This is the base case.

There is a caveat because bonds are the antithesis of stocks. Bonds are relative safe-haven assets that can benefit during risk-off environments. Stocks are riskier assets that perform best in risk-on environments. It seems that we are more risk-off than risk-on when it comes to stocks. Such an environment could benefit bonds so I am keeping an open mind. An upside break at 144 would reverse the short-term downtrend and argue for at least a bounce. Watch 113 for IEF.

The next chart shows the 10-yr Treasury Yield breaking out of a big triangle and then consolidating with a smaller triangle. A consolidation after a sharp advance is typically a bullish continuation pattern and a breakout at 1.85% would be bullish. A break below 1.70 would not affect the long-term uptrend, but it would reverse the short-term upswing and argue for a pullback. Such a move could be negative for the finance-related ETFs and positive for bond proxies (utilities, REITs).

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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