Market and ETF Report – Short-term Breadth Indicators for Thrust and Overbought Conditions, Tech ETFs Break May Highs, JO Intrigues Again (Premium)

Today’s report will update Dow Theory analysis from last month, recall an old adage from Marty Zweig and show that only two assets are holding up. The Dollar remains very strong, which means the opposing currencies are very weak. Energy fell sharply the last five weeks, but remains in an uptrend overall. The same cannot be said for industrial metals, precious metals, bonds and agriculture. These are all in downtrends. Recent breakdowns in industrial metals point to demand destruction and a weakening of the economy.

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.

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

Clissold on Bear Market Rallies

In this video (here), Ed Clissold of Ned Davis research talks about bear market rallies, breadth thrusts and the Fed.

SPX Thrust Model Remains Bearish

There are many fine lines when it comes to technical analysis. A big advance is bullish because it shows strong buying pressure, but it also creates overbought conditions that can foreshadow a reversal. Counter-trend advances within bigger downtrends are expected to fail at some point, but some extend further than expected and reverse the downtrend. As such, there is a (subjective) line in the sand when a counter-trend bounce becomes a trend changing event. I do not think we have crossed that line yet. Even though the advance off the mid June lows is big and shows strong buying pressure, we have yet to see a bullish breadth thrust in more than one indicator.

A bullish breadth thrust occurs with seriously lopsided upside participation. I measure short-term upside participation using the 10-day EMA of Advance-Decline Percent, the percentage of stocks above the 50-day SMA and the percentage of stocks above the 20-day SMA. These three indicators are part of the S&P 500 Thrust Model and this model is one of five components in the Composite Breadth Model. Note that the Composite Breadth Model does not turn bullish until three of the five components are bullish and all five are currently bearish.  

The bottom window in the chart above shows the 10-day EMA of Advance-Decline Percent moving above +30% (green arrow), which is a bullish breadth thrust. This shows strong buying pressure, but we also witnessed bullish breadth thrusts in late March and late May (gray arrows). The latter two thrusts marked near term peaks in SPY. The other windows show SPX %Above 50-day SMA falling short of a thrust because it needs to clear 85% and SPX %Above 20-day SMA falling short because it needs to clear 90% (yellow shading). Participation during the current advance is strong, but not quite strong enough to tip these indicators bullish.

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

Overbought Conditions Similar to late March

Things get tricky and subjective when we consider overbought conditions. First, I am working under the assumption that we are in a bear market because the Composite Breadth Model is bearish and the S&P 500 is in a long-term downtrend (5-day below 200-day). This assumption sets my bias and my bias is bearish. The next chart shows SPY with the Momentum Composite, SPX %Above 20-day SMA and SPX %Above 50-day SMA. The Momentum Composite became overbought in late March and late July as it reached +3 or higher (green lines).

%Above 20-day SMA becomes overbought with a move above 80% and this occurred in the second half of March, late May and late July. %Above 50-day SMA becomes overbought with a move above 70% and this occurred in late March and late July. Currently we are seeing an overbought setup similar to late March because all three indicators are overbought (blue boxes).

SPY is currently in a long-term downtrend, a short-term uptrend and short-term overbought. The long-term downtrend is the dominant force at work and expected to prevail at some point, but the short-term uptrend has yet to reverse. Sometimes we have a pattern or support break to use for timing. Sometimes the advance is too steep for such patterns, such as March. I am watching for SPX %Above 20-day SMA to move below 60% for a short-term bearish signal. The red arrows on the price chart and red shading on the indicator show prior signals.  

Volatility Remains Above Average

The next chart shows SPY with the green and red numbers marking some recent upswings and downswings. Notice the 14% plunge from the June 2nd high to the June 17th low and the 13.5% advance from the June 17th low to the August 3rd high. This is one big round trip within a two month window! Within these two swings, we have an 11.8% decline in 7 days (June 8 to 17) and a 9.7% surge the last 14 days. These are big moves that show above average volatility on both sides. Talk about confused. It also shows that it can be dangerous to chase after big moves because reversals can happen quick. Overall, SPY remains in the resistance-reversal zone and the short-term trend is up. This week’s low marks first support.

The Trend Composite aggregates signals in five trend indicators: Bollinger Bands (125,1), Keltner Channels (125,2), 5-day Rate-of-Change of 125-day SMA, StochClose (125,5) and CCI-Close (125). The Trend Composite and ten other indicators are part of the TIP Indicator Edge Plugin for StockCharts ACP

Biotech ETFs Break Out (IBB, XBI)

Wednesday’s video showed the Biotech SPDR (XBI) and Biotech ETF (IBB) with flag patterns forming in resistance-reversal zones. The long-term trends are still down for both, but the short-term trends are up and we are seeing short-term breakouts. The chart shows IBB surging to the resistance-reversal zone, consolidating and breaking out of a short-term bullish continuation pattern. This short-term breakout signals a continuation of the prior advance. XBI is still in a long-term downtrend and now short-term overbought. A move below this week’s low would negate the breakout. The short red hash shows the ATR Trailing Stop, which is two ATR(22) values below Wednesday’s close. The second chart shows XBI with similar characteristics.

Tech-Based ETFs Spring to Life – Within Downtrends

A number of tech-based ETFs sprang to life on Wednesday as they broke their May highs. These same ETFs remain in long-term downtrends, but also formed small bases from May to July and the breakouts are positive. The first chart shows the Software ETF (IGV) finding support in the 260 area from mid May to mid July and breaking above the May high with a 3.2% surge on Wednesday. Even though the ETF still has the resistance-reversal zone in the 300-320 area to contend with, the short-term trend is up and this breakout is bullish until proven otherwise. A strong breakout should hold and a close below 290 (green line) would show cold feet.

The next chart shows the Cloud Computing ETF (SKYY) breaking its May high and the re-evaluation level at 69 (green line).

The next chart shows the Cybersecurity ETF (CIBR) breaking its May high and the re-evaluation level just below 42.

I consider the breakouts in the biotech and tech-based ETFs as early bird signals that carry above average risk because the long-term trends are down and the Composite Breadth Model is bearish. The early bird does indeed get the worm, but the second mouse gets the cheese because the first one got caught in the trap. A “second mouse” strategy would be to wait for the pullback after the first significant move higher. In other words, let the first move go and wait for a setup. Another alternative would be to wait for the Composite Breadth Model to turn bullish and then choose some ETFs that are in uptrends.

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

TLT with Short-term Counter-trend Bounce

I still consider the TLT advance as a counter-trend move within a bigger downtrend. This advance, however, has yet to reverse as TLT surged on Wednesday. This surge establishes support from the late July and early August lows. A close below these lows would break wedge support and argue for a continuation of the bigger downtrend. A breakdown in TLT would imply a breakout in the 10-yr Treasury Yield.

Coffee Sets Up Again

The Coffee ETF (JO) is in a downtrend with a falling channel since February and the Trend Composite is negative. Even so, the falling channel retraced around 50 to 67 percent of the prior decline and could be a big correction after the 70% advance. JO caught my eye again because it surged in mid July and then consolidated in the mid 50%. A follow through breakout at 60 would be short-term bullish and could lead to a bigger breakout in the mid 60s.

Previous Commentary and Video

Wednesday Market and ETF Video (here)

Market Regime Update with Breadth Model and Yield Spreads (here)

Topics Covered in Tuesday’s Report (here)

  • New Trend Composite Signals with an Asterisk
  • SPY, QQQ and IWM Hit Resistance-Reversal Zones
  • Bonds Bounce Along with Stocks
  • Semis and Housing Running into Resistance (SOXX, ITB)
  • Oil Fails to Bounce Along with Stocks
  • E&P and NatGas ETF Hold Uptrends (XOP, FCG)
  • Clean Energy ETFs Break Out (ICLN, TAN)
  • Most Commodities are Down since mid June
  • Palladium Holds Wide Stop (PALL)
  • Biotech ETF Stalls after Surge (XBI)
  • Aerospace & Defense ETF Breaks Out of Flag (PPA)
  • Healthcare SPDR Holds Breakout, but Starts Lagging (XLV)

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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