Market/ETF Report – Broad Selling, SPY Reverses Near 200-day, XLK with Outside Day at Key Retracement (Premium)

This is a short update covering the S&P 500 SPDR, a bearish breadth signal and two ETFs. Stocks were hit pretty hard on Wednesday with all sectors moving lower. In an interesting twist, the low volatility sectors, Utilities (XLU) and Consumer Staples (XLP), led the way lower with declines of 2.4% and 2.7%, respectively. The Finance SPDR (XLF) and the Industrials SPDR (XLI), which were leading at yearend, were also hit hard with 1.9% declines. The other seven sectors were down between 1.2% and 1.8%. As the intraday chart below shows, most sectors opened strong and then fell throughout the day to close near their lows.

Wednesday’s bout of broad selling pressure hit when the Composite Breadth Model and SPY were at a moment of truth. As detailed in Wednesday’s Market Regime update, a follow through push above 410 for SPY would turn the Composite Breadth Model positive and push the S&P 500 5-day SMA above the 200-day SMA. This push did not materialize and the weight of the evidence remains bearish for stocks. The chart below shows SPY with a reversal day near the 67% retracement and falling 200-day SMA.

Further in this commentary, I will show the short-term reversal signal from SPX %Above 50-day SMA and an outside day in the Technology SPDR (XLK). Throw in seasonal weakness in January and February, and the market could be in for a rough ride in the coming weeks. Here is a link to the seasonality report.

This Week's Schedule

  • Tuesday – 17 Jan: Market/ETF Report and Signal/Rank Table Update
  • Wednesday – 18 Jan: Market/ETF Video and Signal/Rank Table Update
  • Thursday – 19-Jan: Market/ETF Report and Signal/Rank Table Update
  • Thursday – 19-Jan: Part 2 of Mean-Reversion Strategy
  • Friday – Coppock Curve for Long-term Market Timing

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.

SPX %Above 50-day Breaks 60%

The next chart shows SPY with SPX %Above 20-day SMA in the middle window and SPX %Above 50-day SMA in the lower window. As noted on Tuesday, %Above 20-day moved above 80% to become overbought last Wednesday (11 January). This indicator is both overbought and bullish as long as it holds above 60%. In the lower window, %Above 50-day SMA became overbought last week and plunged below 60% on Wednesday for a short-term bearish signal. The blue arrows on the price chart show when %Above 50-day SMA moves below 60% (after being overbought). Also notice that this signal triggered as SPY hit the falling 200-day SMA.

Technology SPDR Reverses at Key Retracement (XLK)

The chart below shows the Technology SPDR (XLK) breaking support with a sharp decline in mid December and then rebounding into January. The long-term trend is down and the January rebound retraced 67% of the December decline. XLK is now showing signs of a short-term reversal with an outside reversal day on Wednesday. This is not a good sign for the sector and related ETFs.

Regional Bank ETF Breaks Flag Support (KRE)

The next chart shows the Regional Bank ETF (KRE) breaking triangle support in early December and forming a rising flag into January. A rising flag is a bearish continuation pattern and the flag break argues for a continuation of the long-term downtrend. The indicator window shows the price-relative trending lower since October as KRE underperforms. Note that Finance is the largest sector (16.77%) in the Russell 2000 ETF (IWM) and weakness in regional banks would weigh on small-caps.

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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