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.
Vacation Notice
It is family vacation time and I will be off the last two weeks of July (17 to 31).
In the meantime, I prepared two strategy articles and these will be posted on July 20th and 27th (Wednesdays). These cover the Trend-Momentum Bull-Bear ETF strategy using the Composite Breadth Model for timing, the Trend Composite for in-state signals and StochClose for ranking. I will explain the strategy in more detail and compare the current drawdown with prior drawdowns. The Composite Breadth Model (CBM) is currently bearish, but these articles will show just how the strategy works when the CBM turns bullish. I will then test when trading on the first and last day of the week.
I will also update the ETF Trend Signal and Ranking Table and the Market Regime charts on Wednesdays and Saturdays during this time. I do not expect the Market Regime to turn bullish in the second half of July, but you never know…
You can learn more about my chart strategy in this article [1] covering the different timeframes, chart settings, StochClose, RSI and StochRSI.
SPY Stalls within Downtrend
Stocks firmed the last few weeks, but this is simply consolidating within a bigger downtrend. For example, SPY bounced at the end of June and then moved sideways to form a triangle of sorts. This is a continuation pattern that gets its bias from the direction of the prior move, which was down (12% in eight days). A triangle break would argue for a continuation lower and further weakness below the June low. Most stocks and stock-based ETFs will move in the same direction as SPY.
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 [2]
Dow Theory Update
Last month I posted a detailed update using Dow Theory and Elliott wave [3] to determine the current phase/wave for this bear market. This report analyzed the 2000-2003 and 2007-2009 bear markets as well. I am more of a Dow Theorist than an Elliott Waver so I will stick mostly with Dow Theory. In contrast to Elliott Wave, Dow Theory asserts that neither the length nor the duration of a bull/bear market can be forecast.
According to Dow Theory, primary bear markets are long-term downtrends caused by “economic ills” and there are three phases. The first phase is when traders give up on overpriced stocks that were bought at the end of the bull market. This process started in the second half of 2021. The second phase is when the economy actually deteriorates and business conditions worsen, which appears to be happening now. The third phase involves selling of “sound securities, regardless of their value” and is also know as the capitulation or panic phase. The news is bad, despair hangs in the air and the public starts to short stocks.
I would suggest that we are currently in Dow Theory phase 2 or Elliott Wave 3. Business conditions are deteriorating as inflation runs rampant. This indicates that we could see a counter-trend Wave 4 bounce and then the 5th Wave down or third phase of the bear market. This is when it becomes the darkest before the dawn. As far as downside guestimates, the blue shading marks a possible support-reversal zone using the September-October 2020 consolidation and the 50-67% retracements.
As far as my timing, I will rely on the Composite Breadth Model and keep an eye on yield spreads. The CBM is a trend-following type model and will never catch the exact top or bottom. It will turn after the market has bounce and will turn bullish when breadth supports the bounce.
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 [2]
Bear Market Rules
Marty Zweig is famous for his mantra: don’t fight the tape and don’t fight the Fed. Zweig is referring to trend and breadth when talking about the tape. Don’t fight the Fed is also worth keeping in mind, but the Fed has been rendered impotent right now because of inflation. The trend is down for the S&P 500 and the Composite Breadth Model is bearish, so the tape is bearish. Don’t fight the tape means don’t look for bullish setups in stock-based ETFs because the odds are not in our favor.
Bearish setups are tempting, but making money on the downside is a lot harder than it looks. Dow Theory notes that bear market rallies can be very sharp and swift. Just look at the 20% bounce from July 23rd to August 22nd, 2002 and the sharp advance (+23%) from November 20th, 2008, to January 6th, 2009.
The Tape for Other Assets
Zweig was talking about stocks when he said don’t fight the tape. We can also extend this to other assets, such as bonds, precious metals, industrial metals, energy, agricultural commodities and currencies. These are the alternatives to stocks, but they are only viable alternatives when in uptrends.
The first chart shows the 20+ Yr Treasury Bond ETF (TLT) in a long-term downtrend. Bonds are the natural alternative to stocks, but only when inflation is under control. TLT opened weak and closed strong along with stocks on Wednesday and is in the midst of an oversold bounce. However, this is a counter-trend bounce within a bigger downtrend. As such, the bigger downtrend is expected to take over at some point and the bounce is expected to fail. A break below the flag line would argue for a continuation lower.
The next chart shows the 10-yr Treasury Yield, which is pretty much the mirror image for TLT. The yield is in a long-term uptrend and hit a new high near 3.5% in mid June. It fell back as TLT bounced, but the decline is viewed as a pullback within a bigger uptrend. TNX appeared to break out last week and fell back into the flag this week. I still think this is a bull flag and expect an upside resolution simply because the bigger trend is up. An upside breakout in the 10-yr yield could weigh on some interest rate sensitive issues that bounced recently (ITB) or firmed the last few weeks (SKYY).
No Love for Precious Metals (DBP, GLD, SLV)
Precious metals are in a downtrend as the DB Precious Metals ETF (DBP) hit a new low in late June and early July. This ETF is 83% gold and 17% silver. The only positive here is that GLD became extremely oversold after a 10% decline in 20 days. The Momentum Composite in the bottom window has also been oversold for seven days straight. Even though this argues for an oversold bounce, GLD is in a clear downtrend and a bounce at this stage would be considered a counter-trend move.
You can learn more about exit strategies in this post [4],
which includes a video and charting options for everyone.
Dollar Reigns Supreme as Swissy Holds Up
Currencies are always viewed in pairs: Dollar/Euro, Dollar/Yen, Euro/Yen, Aussie/Swissy etc. Dollar strength translates into Euro weakness, while Euro strength translates into Dollar weakness. The Dollar Bullish ETF (UUP) tracks the Dollar relative to six other currencies. The Dollar is hitting new highs relative to five currencies ($USDEUR, $USDYEN, $USDGBP, $USDCAD, $USDSEK). Dollar/Swissy ($USDCHF) hit a new high in mid May and has been moving sideways the last two months. The Swiss Franc is a safe-haven currency and it is holding up better than the others. This also speaks to the risk-off environment right now.
Most Industrial Metals are Trending Lower (DBB)
The DB Base Metals ETF (DBB) represents three industrial metals (aluminum, copper and zinc). Even though there are others, these three are as representative of the group as any three. Other industrial metals include: cobalt, lead, lithium, nickel, palladium, steel and tin. You can chart most of these on TradingView (affiliate link here [5]) and they are all down since April. Palladium is holding up the best, but the group as a whole is weak and this is weighing.
The chart below shows DBB falling some 31% since mid April and the Trend Composite turning bearish on June 10th (red arrow). DBB also broke flag support just before this signal. The speed of the decline is more breadth-taking than the surge off the covid low (+31% in six months). Notice that the 31% decline occurred in half the time, which confirms the Wall Street adage that stocks take the stairs up and the elevator down. DBB is oversold, but in a strong downtrend that bodes ill for future demand (the economy).
Here are some of the symbols on TradingView [5]:
- Aluminum (AL1!)
- Cobalt (COB1!)
- Copper (COPPER1!)
- Lead (LEAD1!)
- Lithium (GLI!)
- Nickel (NICKEL1!)
- Palladium (PA1!)
- Steel Iron Ore (FEF1!)
- Zinc (ZINC1!)
Energy is Not Immune, but Technically in Uptrend (DBE)
The next chart shows the DB Energy ETF (DBE) hitting a new high on June 9th and then falling over 20%. Even so, this decline still looks like a pullback within a bigger uptrend. The new high in June and positive Trend Composite indicate long-term uptrend still. The current decline, while steep, retraced 66.7% of the March-June advance and less than 50% of the December-June advance. The immediate trend is down since June and this needs to be respected until reversed. In addition, I am quite concerned with broad weakness in commodities overall and this could bleed into oil. Watch for a break above this week’s high (26) to reverse the six week slide.
DB Agriculture ETF Moves into Long-term Downtrend (DBA)
The final asset chart shows the DB Agriculture ETF (DBA) breaking down with a sharp decline in June and the Trend Composite turning negative on June 27th. This was a violent breakdown and the long-term trend is down for DBA.
Previous Commentary and Video
Wednesday Market and ETF Video (here [6])
Market Regime Update with Breadth Model and Yield Spreads (here [7])
Topics Covered in Tuesday’s Report (here [8])
- Vacation Notice (July 17 to 31)
- Breadth Model is Negative and Yield Spreads Show Stress
- SPY Bounces within Clear Downtrend (plus QQQ, IWM)
- Oil Swings Down within Bigger Consolidation ($WTIC)
- DB Energy ETF Hits Support Zone (DBE)
- Energy SPDR Continues to Test Support (XLE)
- Palladium ETF Breaks Out with Big Move (PALL)
- Defensive ETFs Hold Up Best, But Still Down (XLV, XLP, XLU, PBJ, DVY, PPA)
- Some Less Dirty Shirts Among the Dirty Clothes
- Global Clean Energy ETF Forms Competing Pattern (ICLN)
- Coffee ETF Bites the Dust (JO)
- Key Groups in Downtrends (SOXX, KRE, XRT, CARZ, ITB)
You can learn more about my chart strategy in this article [1] covering the different timeframes, chart settings, StochClose, RSI and StochRSI.