Despite a big advance in June, the Market Regime remains bearish and risk is above average for stock-based ETFs. In addition, the Trend Composite is negative for the vast majority of stock ETFs. A few ETFs related to clean energy, fossil fuels, consumer staples, healthcare and utilities are in uptrends. These are not exactly risk-on groups. Needless to say, the pickings are very slim because most ETFs are in downtrends and we are in a bear market. The DB Energy ETF (DBE) and oil are still in uptrends, but the other commodity-based ETFs are in downtrends (DBB, DBA, GLD). The Dollar Bullish ETF (UUP) is still in an uptrend, but corrected in July as stocks and bonds surged. Overall, the bounces in stocks and bonds are considered a secondary advances within a primary downtrends. SPY is running into a resistance-reversal zone and short-term overbought, which puts it in a precarious spot.
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.
This Week's Commentary Schedule
- Tuesday – 2 August: Market-ETF Report and Signal-Rank Table Update
- Wednesday – 3 August Market-ETF Video and Market Regime Update
- Thursday – 4 August: Market-ETF Report and Signal-Rank Table Update
- Saturday – 6 August: ETF Signal and Rank Table
Breadth Model Remains Bearish
The S&P 500 surged 9.2% in July and is up around 12% since mid June. These are impressive gains, but the weight of the evidence remains bearish for the stock market. The 5-day SMA for the S&P 500 remains below the 200-day SMA and the 200-day SMA is falling. Fewer than 35% of S&P 500 stocks are above their 200-day SMAs, which means more than 65% are below. And finally, all five inputs for the Composite Breadth Model are bearish. Bottom Line: the Market Regime is bearish and risk remains above average for stocks.
New Trend Composite Signals with an Asterisk
The table below shows new bullish Trend Composite signals (NewUp) in eight stock-based ETFs last week. In particular, we saw three new uptrend signals in some clean-energy ETFs (QCLN, ACES, ICLN). The Solar Energy ETF (TAN) triggered bullish 17 days ago. Clearly, money is finding its way into clean-energy as this group surged last week.
Despite these bullish signals, keep in mind that the Composite Breadth Model is bearish and this means risk in stock-based ETFs is above average. Hence, the asterisk for this bullish signals*. The Trend-Momentum Bull-Bear ETF Strategy was updated in July with two new articles (part 9 and part 10). This strategy focuses on the 50 All Weather ETFs and the left column shows three AllW ETFs with new uptrend signals. According to the strategy, bullish signals in stock-based ETFs are ignored when the Composite Breadth Model is bearish. This is because risk in stocks is deemed too high during bear markets and the chance of loss are above average.
SPY, QQQ and IWM Hit Resistance-Reversal Zones
I am working under the assumption that the Market Regime is bearish and the primary trend is down for the S&P 500. This means advances are deemed secondary moves that run counter to the bigger downtrend. Counter-trend bounces are expected to fail at some point and SPY is near a resistance-reversal zone now. The chart below shows broken supports turning into resistance in the 420 area (blue shading). The advance also retraced 50 to 67 percent of the April-June decline. Counter-trend bounces are expected to retrace around half of the prior decline.
In addition to the resistance-reversal zone, SPY is short-term overbought after a 12% advance since mid June. The percentage gain alone tells us that SPY is overbought. The Momentum Composite confirms overbought conditions with a +4 reading last week. For reference, the green numbers on the chart show prior counter-trend bounces of 6, 10 and 8 percent. The red numbers show three double digit declines of 10, 17 and 14 percent. SPY was very oversold in mid June after the 14% decline and entitled to a counter-trend bounce. It initially looked like the bounce would fizzle in the 390 area, but stocks caught a strong bid the last four weeks and the counter-trend bounce extended.
The next chart shows QQQ hitting the lower boundary of the resistance-reversal zone (blue shading).
The next chart shows IWM hitting this zone as well.
In addition, the next charts show the Technology SPDR (XLK) and Consumer Discretionary SPDR (XLY) also hitting resistance-reversal zones.
Despite an impressive move since mid June, the Market Regime remains bearish and the S&P 500 is in a primary downtrend. Given these conditions, I would not want to be buying a stock-based ETF that is short-term overbought and trading in a resistance-reversal zone.
Bonds Bounce Along with Stocks (TLT)
Stocks and bonds have been positively correlated here in 2022 as both fell from January to June and then bounced the last six weeks. The chart below shows TLT with a 7.5% advance off the mid June low. This is the biggest upswing since the downtrend started (early January breakdown). As with SPY, the bounce in TLT is deemed a counter-trend move because the bigger trend is down. The blue lines define this counter-trend advance and a break below last week’s low would reverse the upswing.
Semis and Housing Running into Resistance (SOXX, ITB)
The rise in TLT means the 10-yr Treasury Yield fell and this was perhaps positive for housing and high-beta stocks. The charts below show the Semiconductor ETF (SOXX) and the Home Construction ETF (ITB) with double-digit advances off their mid June lows. Note that the June lows were 52-week lows, which means both were and are in long-term downtrends. The first chart shows ITB surging to resistance from the May-June highs. The blue lines define the rate of ascent and support is marked at 58 (green line). A break would reverse the upswing and be bearish.
The second chart shows SOXX nearing the underside of the resistance-reversal zone (420-440) as it retraced around half of the April-July decline. The immediate swing is up, but this is deemed a counter-trend advance within a bigger downtrend. A break below 380 would reverse this upswing.
Oil Fails to Bounce Along with Stocks ($WTIC)
In the “things that make you go hmm…” category, note that SPY was up 9.2% in June and oil ($WTIC) was down 6.75%. $NATGAS, which marches to the beat of a different drummer, was up 51% in June. Oil’s inability to bounce is a concern for oil and energy-based ETFs. On the price chart, oil surged some 90% from December to March and then moved into a trading range. Oil is holding the spring lows for now (green shading), but the short-term trend is down (downswing since mid June). There was a setup brewing in early July and a StochRSI pop on July 18th, but this failed. A short-term peak formed with Monday’s sharp decline and I would use this to mark short-term resistance. A close above 101 would reverse the short-term downswing.
You can learn more about my chart strategy in this article covering the different timeframes, chart settings, StochClose, RSI and StochRSI.
The next chart shows NatGas futures from TradingView (NG1!). The ETF fell sharply into June as it retraced 50 to 67 percent of the prior advance and returned to broken resistance. This combination created a support-reversal zone (blue shading) that was featured on June 28th. NG1! broke out with a surge in early July. The bottom window shows the 22-day SMA for the 1-day Absolute Percentage Change and NatGas moves 4.6% per day on average. This one is not for the faint at heart.
The DB Energy ETF (DBE) is 12.14% NatGas, 47.5% gasoline and 40% crude oil. Strength in NatGas helped DBE, but the weighting is not high enough as weakness in gasoline and oil weighed. DBE broke out last week and fell back sharply on Monday. The red line shows the ATR Trailing Stop at 24.24 and a close below this level would argue for a re-evaluation.
You can learn more about the ATR Trailing Stop and exit strategies in this post,
which includes a video and charting options for everyone.
E&P and NatGas ETF Hold Uptrends (XOP, FCG)
The Oil & Gas Exploration & Production ETF (XOP) and the Natural Gas ETF (FCG) were the only two energy-based stock ETFs to hold their uptrends during the June-July decline. The Trend Composite turned negative for XLE, XES and AMLP (and back positive for XLE). This means XOP and FCG are the strongest of the group. The first chart shows the Oil & Gas Exploration & Production ETF (XOP) with a new high in June, a deep pullback into July and a wedge breakout on July 19th. The initial ATR Trailing Stop was set 3 ATR(22) values below the breakout close to place it just below the July lows.
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
Clean Energy ETFs Break Out (ICLN, TAN)
The Solar Energy ETF (TAN) was featured for my weekly promotional article (here) and the Global Clean Energy ETF (ICLN) has been on the radar since mid June. At the time, ICLN was holding up better than the broader market and firming at the 67% retracement line. ICLN broke out on June 21st and I then added the ATR Trailing Stop, which is 2 ATR(22) values below the highest close since the breakout. A CLOSE below this stop would call for a re-evaluation and ICLN did not close below the stop. The stop rose along with ICLN and is currently at 20.96. This was a short-term setup with a rather tight stop.
There is a second stop on the chart at 18.30, which is a trend-following type stop because it is wide to allow more wiggle room. The Trend Composite turned positive on July 27th and I set the stop using 6 ATR(22) values. The ATR multiplier (6) put the initial stop just below the June-July lows, which mark a support level. Currently at 18.30, this stop is some 17% below current levels, which means one would take a pretty good hit if this trade fails. Also keep in mind that ICLN has above average volatility and we are still in a bear market environment.
Palladium Holds Wide Stop (PALL)
Before looking at the Palladium ETF (PALL), the PerfChart below shows that it has been a rough six weeks for commodities. Copper is down around 12%, gold and silver are down, and grains are down sharply. NatGas and Palladium stand out. Not only because they are up, but also because they are up big and bucking the trend.
The Palladium ETF (PALL) was featured as it broke resistance from the May highs with a surge in early July. Overall, the ETF hit a new high with a 100% advance into March and then fell with a falling wedge into June. The wedge was deemed a deep correction because PALL ultimately held above the December low. This was a subjective chart assessment because the Trend Composite remained negative. The ATR Trailing Stop was placed just below the June low (5 ATR(22) values) and this wide trend-following stop held after the pop-drop. PALL is a very volatile ETF so we should expect some big swings (above average risk).
Biotech ETF Stalls after Surge (XBI)
The Biotech SPDR (XBI) was on the radar in mid June because it was holding up better than the broader market. XBI broke short-term resistance on June 17th and the XBI:SPY ratio broke its May high that same day. This was a short-term play with above average risk because the bigger trend was down and the Market Regime was bearish. XBI followed through on the 17-June breakout, but is now in a resistance-reversal zone and lagging the last few weeks (red arrow). This may be as far as biotechs go.
You can learn more about the ATR Trailing Stop and exit strategies in this post,
which includes a video and charting options for everyone.
Aerospace & Defense ETF Breaks Out of Flag (PPA)
The Aerospace & Defense ETF (PPA) was on the radar in early July because it was holding up better than the rest of the market and a bull flag was forming. PPA broke out of this flag with a surge on July 19th and surged again the last three days. The Trend Composite (not shown) is still negative, but PPA is one of the few stock-based ETFs with a year-to-date gain (+3.31%). The breakout zone in the 71 area turns first support to watch should we see a throwback. The ATR Trailing Stop is set 2.5 ATR(22) values below the highest close since the breakout. Taken together, a close below 71 would argue for a re-evaluation.
Healthcare SPDR Holds Breakout, but Starts Lagging (XLV)
The Healthcare SPDR (XLV) was leading the market in late June and broke out of a small flag in early July. There was a deep dip, but the ETF did not close below the green line in the sand (127), which was set on July 12th. Even tough XLV continued higher the last few weeks, it lagged the broader market as the XLV:SPY ratio turned down. Nevertheless, the swing is still up and I added the ATR Trailing Stop to make this a dynamic stop. A close below 128 would argue for a re-evaluation.
Previous Commentary
The commentary (here) on Thursday, July 14th, covered the following:
- Dow Theory Update and Bear Market Rules
- Bonds Get Oversold Bounce within Bigger Downtrend (TLT, $TNX)
- No Love for Precious Metals (DBP, GLD, SLV)
- Dollar Reigns Supreme as Swissy Holds Up
- Most Industrials Metals are Trending Lower (DBB)
- Energy is Not Immune, but Technically in Uptrend (DBE)
- DB Agriculture ETF Moves into Long-term Downtrend (DBA)
You can learn more about my chart strategy in this article covering the different timeframes, chart settings, StochClose, RSI and StochRSI.