We are seeing more bullish Trend Composite signals, but the weight of the evidence remains bearish for stocks. Of the 274 ETFs in the master list, there are 22 ETFs (13%) with positive Trend Composites (uptrends) and 152 (87%) with downtrends. The uptrend signals are mostly concentrated in defensive sectors, clean energy and biotechs. The offensive sectors and tech-based ETFs have yet to trigger uptrend signals and remain laggards. This alone tells us that the market environment is more defensive (risk-off) than offensive (risk-on). The Composite Breadth Model remains bearish. There are dozens of ETFs that have long-term downtrends and are trading in resistance-reversal zones similar to SPY and QQQ. These include XLY, XLK, XLI, SOXX, ITB, KRE and DRIV.
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 – 9 August: Market-ETF Report and Signal-Rank Table Update
- Wednesday – 10 August Market-ETF Video and Market Regime Update
- Thursday – 11 August: Market-ETF Report and Signal-Rank Table Update
- Saturday – 13 August: ETF Signal and Rank Table
Breadth Model Remains Bearish
The S&P 500 is well off its mid June lows after a ~13 percent advance the last seven weeks. Despite this advance, the 5-day SMA remains below the falling 200-day SMA and more than 65% of S&P 500 stocks are below their 200-day SMAs (33.76% are above). The Composite Breadth Model reflects the weight of the evidence and it remains at -5 (bearish). Thus, we are still in a bear market environment (Market Regime). Working under this assumption, the advance off the mid June low, while strong, is still considered a counter-trend advance within a bigger downtrend (bear market).
New Trend Composite Signals with an Asterisk
The table below shows the new Trend Composite signals over the last five trading days. I did a top-down sort here to show the sector signals first and then industry group signals, which are grouped by sector. There were new uptrends in the EW Consumer Staples ETF (RHS), EW Utilities ETF (RYU) and Water Resources ETF (PHO), three defensive groups.
Elsewhere, we are seeing strength within the healthcare sector with new uptrends in the Biotech ETF (IBB), Biotech SPDR (XBI) and Medical Breakthroughs ETF (SBIO) (blue shading). Biotechs really came to life last week and I will cover the signals in IBB and XBI in this report. The Clean Energy ETF (PBD) joined the other clean energy ETFs with an uptrend signal (ACES, TAN, ICLN, QCLN). The Lithium Battery Tech ETF (LIT) also triggered bullish.
Despite these bullish signals, the bigger picture remains the same as last week. These are stock-based ETFs and we are still in a bear market environment. Hence, uptrend signals with an asterisk. This means risk in stock-based ETFs is still deemed above average and discretion is warranted. Two ETFs with new uptrends are in the All Weather ETF List (green shading), but they would not be considered for the Trend Momentum Bull-Bear ETF strategy until the Composite Breadth Model turns bullish. See part 9 and part 10 of the series.
SPY, QQQ and IWM Hit Resistance-Reversal Zones
I am still 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 and meet resistance near prior support breaks.
The immediate swing is up for SPY and I am watching two things for signs of a reversal. First, the chart above shows short-term support at 407, a break of which would reverse this upswing. Second, the chart below shows three indicators becoming overbought in late July and early August. The Momentum Composite hit +3 or higher, SPX %Above 20-day SMA exceeded 80% and SPX %Above 50-day SMA exceeded 70%. A subsequent move below 60% (red line) in SPX %Above 20-day SMA would be short-term bearish. The red arrows in the top window on the chart below show prior signals.
Despite an impressive move since mid June, the Market Regime remains bearish, the S&P 500 is in a primary downtrend and SPY was short-term overbought in early August. 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.
Dissecting the Trend Composite Signal in IBB
The Biotech ETF (IBB) has been on the radar since mid June when it was holding up better than the broader market. It was highlighted in Wednesday’s video with a bull flag taking shape and again on Thursday with the breakout. The Trend Composite then turned positive on Friday as the ETF surged the last three days. The first chart is from StockCharts ACP using the TIP Indicator Edge Plugin. It shows IBB with the five Trend Composite indicators and the Trend Composite at +3. This means four indicators are bullish and one bearish. Last Friday, IBB broke the upper Keltner Channel, StochClose exceeded 60 in late July and CCI moved above 100 (three bullish signals). IBB broke the upper Bollinger Band on Monday. The 5-day Rate-of-Change of the 125-day SMA remains negative and the only indicator still bearish.
A Tale of Two ATR Trailing Stops (IBB, XBI)
The next chart shows IBB with two ATR Trailing Stops, one tight and one wide. The choice of trailing stop depends on your timeframe, trading style and personal preferences. Short-term traders using the mid June resistance break and flag breakout would use a tighter stop-loss, 2 ATR(22) values. This stop is currently at 125.56.
Trend Followers acting on trend signals would need a wider stop to absorb a pullback. Jerry Parker refers to wide stops as trading with “loose pants”. Here is a link to a recent Youtube podcast on the subject. For trend-following, I use a 6 ATR(22) stop to give the breakout plenty of wiggle room. An exit signal would trigger on a close below this stop or when the Trend Composite turns negative. The same is true for the Biotech SPDR (XBI).
Trend Signals and Trailing Stops for Clean Energy (TAN, ICLN)
The next chart shows ICLN with two ATR Trailing Stops. The 2xATR(22) stop is for the short-term breakout on June 21st and the 6xATR(22) stop is for the Trend Composite signal on July 28th. In the case with ICLN, I aligned the stop with the July lows by using 6 for the ATR(22) multiplier (red dashed line). Short-term, ICLN is extended after a 20% surge since mid July. A pullback into the gap zone would trigger the tight stop, but the wide stop would not because it has more wiggle room (loose pants).
Lithium Battery Tech ETF Triggers Uptrend (LIT)
The next chart shows the Lithium Battery Tech ETF (LIT) with the Trend Composite turning positive on Monday (green 1). The chart annotations show a hindsight analysis breakout in mid May, a wedge correction into mid July and a wedge breakout. LIT is one of the better performers because it held well above its spring lows in June-July and its Trend Composite turned positive. The short red line at 68.44 marks the ATR Trailing Stop set 5 ATR(22) values below Monday’s close. Using 5 as the multiplier puts it right at the July low and a close below this level would negate the wedge breakout.
Energy ETFs Fall Back after Breakouts (XOP, FCG)
The Oil & Gas Exploration & Production ETF (XOP) and Natural Gas ETF (FCG) were featured because they were the only energy-based ETFs to hold their uptrends during the June-July decline. Both formed falling wedge patterns and broke out of these wedges with surges in the second half of August. I placed the ATR Trailing Stop 3 ATR(22) values below the close on the breakout day, which placed the initial stop below the wedge low. This is not a “loose pants” stop because it is based on a pattern breakout, not a Trend Composite signal. The second chart shows the Natural Gas ETF (FCG) with similar characteristics.
Concern with Weakness in Oil (WTIC, DBE)
I am concerned with energy-related ETFs because oil broke its spring lows and the Trend Composite turned negative. The chart below shows West Texas Intermediate ($WTIC) breaking its March-April lows with further weakness in early August. This push lower turned the Trend Composite negative for the first time since December. Even though oil remains well above its December lows, the summer downtrend dominates and a breakout at 101 is needed to reverse this downswing.
The DB Energy ETF (DBE) is dominated by gasoline and oil with natgas accounting for just 12% of the ETF. Weakness in oil and gasoline is weighing on DBE as it triggered the ATR Trailing Stop with a decline last week. The Trend Composite remains positive because DBE is well above its March low, but it is hard to imagine DBE moving out as long as oil is weak.
Palladium Exceeds July High (PALL)
The Palladium ETF (PALL) is an example where I am turning a blind eye to the negative Trend Composite and focusing on the price chart. Trend Composite signals are just prone to whipsaws with some ETFs and the price chart is sometimes better suited for analysis. XLU and IHF also come to mind. Before looking at the chart, note that palladium is the best performing commodity since mid June (+26%). The chart shows PALL with a 100% advance and a long falling wedge decline that held above the December low. PALL broke the wedge line and then broke resistance at 192. This resistance breakout was bullish and a “loose pants” stop was needed to absorb volatility. I placed a 5 ATR(22) stop to align with the June low and this stop was enough to absorb the sharp pullback in July. PALL is still quite volatile and the current stop (171.79) is some 17% below the last close.
Wheat and Agriculture ETFs Firm after big Declines (WEAT, DBA)
The commodity world was rattled on February 24th when Putin invaded Ukraine. Prices shot up into early spring and inflationary pressures surged into June. Commodity prices did not, however, remain high as many fell sharply from May to July. In fact, many are below their February 24 levels and volatility is making analysis a challenge. The chart below shows the Wheat ETF (WEAT) near 9 on February 24th, above 12 in mid May and trading closer to 8 today. Note that WEAT was in an uptrend before the February invasion and has returned to the prior uptrend (green dashed lines). What a long strange trip its been! WEAT remains a volatile commodity ETF, but it is firming in the 8 area since July. The highest close since mid July is at 8.5 and a close above this level would trigger a short-term breakout.
The next chart shows the DB Agriculture ETF (DBA) with the top holdings in the upper left. Cattle account for around 15% of the ETF (Live Cattle 11.8% and Feeder Cattle 3.06%). I guess cows are agriculturally related and the Livestock ETF (COW) is up 9% since late June. Wheat used to be the largest holding, but the weightings shifted along with price action (WEAT is down around 30% since mid May). Returning to DBA, I see a setup similar to WEAT because DBA was hit hard from mid May to late June and then firmed since July. A breakout at 20.5 would be short-term bullish.
20+ Yr Treasury Bond ETF Affirms Upswing Support (TLT)
Trading is getting volatile in TLT with three moves of at least 2% in the last six days and two moves in excess of 1%. TLT fell sharply after the employment report on Friday (-2.4%) and then rebounded with a 1.6% gain on Monday. This bounce reinforces upswing support and a break below 116 would be bearish. The long-term trend is down for TLT and I view the rising wedge since mid June as a counter-trend bounce (bear market rally). The wedge is a pattern typical for such bounces and a wedge break would reverse this upswing. Such a move would signal a continuation lower and target a move below the June lows.
The commentary (here) on Thursday, August 4th, covered the following:
- Clissold on Bear Market Rallies
- SPX Thrust Model Remains Bearish
- Overbought Conditions Similar to late March
- Volatility Remains Above Average
- Biotech ETFs Break Out (IBB, XBI)
- Tech-Based ETFs Spring to Life – Within Downtrends
- TLT with Short-term Counter-trend Bounce
- Coffee Sets Up Again