Market and ETF Report – SPY Consolidates within Downtrend, Oil in Downswing, Defensive ETFs Holding Up the Best, PALL Breaks (Premium)

Stocks became oversold after a sharp decline in June and then bounced to varying degrees. Some of these bounces were quite sharp (ITB, IBB) and some ETFs simply consolidated (SPY, KRE). Almost all ETFs are in downtrends and this means the bounces are considered counter-trend bounces. They are expected to fail at some point because the long-term downtrends and bear market are the dominant forces at work right now. Elsewhere, defensive groups are holding better, XLE continues to test support and PALL gets a breakout.

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 – 12 July: Market-ETF Report and Signal-Rank Table Update
  • Wednesday – 13 July: Market-ETF Video and Market Regime Update
  • Thursday – 14 July: Market-ETF Report and Signal-Rank Table Update
  • Saturday – 16 July: ETF Signal and Rank Table

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 taking signals a few days later or when taking end-of-week signals.

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.

Breadth Model is Negative and Yield Spreads Show Stress

The Market Regime is bearish because the Composite Breadth Model (CBM) remains at -5 and yield spreads remain elevated. All five CBM inputs are bearish. The SPX 5-day SMA is over 11% below the 200-day SMA and only 20.5% of S&P 500 stocks are above their 200-day SMAs. Around 80% are below and this means 80% of S&P 500 stocks are in long-term downtrends. Not a pretty picture.

The BBB yield spread came down a little with a dip below 2, but the overall trajectory is up and it remains elevated. Even though the recent widening is not nearly as steep as the covid spike, it is moving in the direction of stress (rising) and is above the highs from the second half of 2019 (pre-covid). This shows stress in the credit markets and this is negative for stocks.

Bear Market Broadens its Grip Even More

A bearish Composite Breadth Model and rising BBB spread translate into a bearish Market Regime for stocks. Some stocks will buck the bear, but trading the long side during bear markets is a challenge, to say the least. The short side is not any easier because bear market rallies can be very sharp and swift.

Elsewhere, there were more downtrend signals over the past week. Of the 274 ETFs tracked on the ETF Trend Signal and Ranking Table, only 9 have positive Trend Composite values (uptrends) and 265 are in downtrends. There are a few energy-related ETFs still in uptrends, the  Wheat ETF (WEAT) is still holding on to its uptrend, the Dollar Bullish ETF (UUP) is the strongest of all and the Solar Energy ETF (TAN) recently triggered bullish. Be careful with TAN because it is still a stock-based ETF and the Composite Breadth Model is bearish.

The bottom of the image shows some of the recent downtrend signals. Agricultural commodity ETFs were hit as soybeans, corn and sugar turned down. Three energy-related ETFs were also hit as the Small-cap Energy ETF (PSCE), Natural Resources ETF (IGE) and Oil Refiners ETF (CRAK) were pummeled. Again, the number of downtrends out there is increasing as more groups get hit.

SPY Bounces within Clear Downtrend

Stocks bounced last week and these bounces are considered counter-trend moves within bigger downtrends. Sometimes these bounces form a clear bearish continuation pattern, such as a rising flag, rising wedge or small triangle. Other times, the pattern is unclear or it is some sort of hybrid pattern. One thing, however, is clear. The bigger trend is down and we are in a bear market environment. Thus, the bounce is expected to fail at some point.

SPY, QQQ and IWM did not exceed their late June highs and fell back the last two days. As such, it is possible that a triangle is taking shape after the sharp decline in the first half of June. This is a consolidation pattern designed to work off oversold conditions. It is also a bearish continuation pattern and a continuation in the direction of the bigger trend or prior move is expected (down). Also notice that SPY is in a resistance-reversal zone in the 390-400 area as this bounce retraced 50 to 67 percent of the 12% decline and there is resistance from the channel line and late June high.

QQQ is also bouncing/consolidating within a bigger downtrend.

Ditto for IWM.

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

Oil Swings Down within Bigger Consolidation ($WTIC)

Oil is consolidating after a big advance from late November to early March (65 to 120). This consolidation could be a big triangle (dashed lines) and a breakout at 120 would signal a continuation higher. The swing within the triangle is down with a falling channel taking shape. A breakout at 110 would reverse this fall and argue for a bigger resistance challenge in the 120 area. The middle indicator window shows the Momentum Composite becoming oversold on 22-23 June and the lower window shows StochRSI failing to pop above .80 after these oversold readings. The setup is still there and a StochRSI pop above .80 would show a short-term momentum thrust.

DB Energy ETF Hits Support Zone (DBE)

The DB Energy ETF (DBE) advanced some 48% from mid March to early June and then fell over 20%. There was a sharp five day plunge into early July that pushed the Momentum Composite to -4 twice (oversold) and the ETF bounced near the 67% retracement line. We do not have a picture perfect bullish continuation pattern, such as a falling flag or wedge. However, the decline is still viewed as a correction within a bigger uptrend because the bigger trend is, well, up. A break above 26.5 would be bullish on the price chart. StochRSI already popped with a move above .80 on Wednesday so there is already a short-term momentum thrust at work.

Keep in mind that volatility is very high and this is a high-risk ETF. The monthly annualized standard deviation is above 40% and the average daily price change is 1.75%. Note that DBE is around 48% gasoline, 40% oil and 11% natural gas. This means there are other dynamics at work, but oil is still the main driver here.

Energy SPDR Continues to Test Support (XLE)

The energy-related ETFs are highly correlated to the price of oil and a breakout in oil would be positive for the group. These include the Energy SPDR (XLE), Oil & Gas Equipment & Services ETF (XES), Oil & Gas Exploration & Production ETF (XOP), Small-cap Energy ETF (PSCE) and Natural Gas ETF (FCG). Note that the group as a whole has above average volatility and XLE is the least volatile of this volatile group.

XLE, XOP and FCG are the only three that are still in uptrends. On the price chart, XLE advanced some 80% and then retraced around 67% of this advance with a 25+ percent decline. A falling wedge is also taking shape and the ETF is trying to firm near the February lows. A setup is in the making simply because the long-term trend is still up and a decline is viewed as a correction as long as the long-term trend is up. XLE became oversold in mid June and there was a StochRSI pop on June 28th. This did not work and there was another pop last Friday as the ETF opened above 70. I am looking for follow through with a break above 73 (red line).

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

Palladium ETF Breaks Out with Big Move (PALL)

The Palladium ETF (PALL) was featured last Thursday and the ETF surged on Friday with a 7.7% gain. Overall, PALL surged some 100% and then fell over 40% with the March-June decline. Three potential falling wedges formed as the ETF held above its March low and PALL broke out with a surge above the May highs last week. The Trend Composite has yet to turn positive, but the wedge breakout is bullish. PALL is very volatile and the rest of the industrial metals are in downtrends so this is a risky trade still. I usually set initial stops below the low of the pattern, which is the June low for this falling wedge. This means a 5xATR(22) Trailing Stop at 165.44 to start (17% lower).

Defensive ETFs Hold Up Best, But Still Down


There are several ETFs holding up better than the broader market and most of these represent the defensive groups (Healthcare, Utilities, Consumer Staples). The Aerospace & Defense ETF (PPA), thought is not normally considered a “defensive” group, strangely enough. Even though these groups are holding up better, June showed us that they are not immune to the bear market.

The Healthcare SPDR (XLV), Utilities SPDR (XLU), Select Dividend ETF (DVY), Consumer Staples SPDR (XLP), Food & Beverage ETF (PBJ) and Aerospace & Defense ETF (PPA) are all down year-to-date (130-day ROC). XLV, PPA and XLP hit 52-week lows in June and are below their 200-day SMAs. DVY and PBJ did not hit 52-week lows, but are below their 200-day SMAs. XLU did not hit a 52-week low and is just above its 200-day SMA. XLU is the least weak of the ETFs that are holding up better than the broader market.

Some Less Dirty Shirts Among the Dirty Clothes

The Healthcare SPDR (XLV) plunged in the first half of June, recaptured this decline in the second half, formed a small flag into early July and broke flag resistance. The flag breakout is short-term bullish and XLV is showing relative strength over the last 12 months – and over the last four weeks. Even so, we need to be careful because this is still a stock-based ETF. A close below 127 would negate the flag breakout.

The Consumer Staples SPDR (XLP) is outperforming the last four weeks, but hitting a possible resistance-reversal zone marked by the June high and channel break.

I have no idea about the Utilities SPDR (XLU) because it is in the middle of a trading range that extends back to September. Short-term, XLU is trading near a potential short-term reversal zone marked by the 67% retracement.

The Aerospace & Defense ETF (PPA) is all over the place, but above the November-May lows (blue shading). This is why it is holding up better than SPY and the PPA/SPY ratio line is rising (bottom window). PPA, however, is hardly in an uptrend (red dashed lines). The ETF surged back above the support break in the second half of June and then consolidated with a flag type pattern. A breakout here would be short-term bullish.

Global Clean Energy ETF Forms Competing Pattern (ICLN)

The Global Clean Energy ETF (ICLN) is in a long-term downtrend and short-term uptrend. This ETF was featured on June 21st as it held near the 66.7% retracement and broke short-term resistance. Follow through has been choppy, but the short-term trend is up as a rising wedge takes shape. This is the pattern that could negate the short-term breakout because a rising wedge is a bearish continuation pattern. A break below the lower line would signal a continuation lower and argue for a test of the May low. Also note that the ATR Trailing Stop is at 18.70.

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

Coffee ETF Bites the Dust (JO)

The Coffee ETF (JO) was holding up in the face of broad weakness within agricultural commodities, but it too succumbed to selling pressure and broke down. JO broke out of a falling wedge on May 31st, stalled around this breakout for a few weeks and failed to continue higher. The potential falling flag failed too as JO fell sharply on Monday and triggered the ATR Trailing Stop.

Key Groups in Downtrends

There are a number of key groups that are in strong downtrends and they forged fresh 52-week lows in June. One of these 52-week lows will be the last, but for now they are in downtrends and supporting the case for a bear market. These groups are cyclical in nature and leading downtrends point to weakness in the economy.

The first chart shows the Semiconductor ETF (SOXX) hitting a new closing low on June 30th and bouncing the last few days. There is a lot of work require here to reverse this downtrend. Note that the downtrend started with the breakdown in January and there have been at least three counter-trend bounces along the way.

The Regional Bank ETF (KRE) plunged to new lows in June, became oversold and then consolidated with a triangle (bearish continuation pattern). A breakout at 60 would be short-term positive, but still considered a counter-trend bounce.

The Retail SPDR (XRT) is in a leading downtrend with a new low in late June. The ETF broke the triangle line at the end of June and then bounced back into the triangle. This small bounce is not a big deal because XRT is still in a leading downtrend (think retail spending).

The Global Auto ETF (CARZ) hit a new closing low at the end of June as well. Stocks in this ETF are also part of the Consumer Discretionary sector and reflective of consumer spending.

The Home Construction ETF (ITB) got a big bounce the last three weeks (~15%) and is stronger than the ETFs above. Even so, this is a counter-trend bounce within a bigger downtrend.  The bounce retraced around 2/3 of the June plunge and is hitting the upper line of the falling channel. The Momentum Composite is at +1, but ITB is short-term overbought after a 15% advance in as many days. Careful…

Previous Commentary

Thursday’s commentary (here) covered the following:

  • SPY Gets Oversold Bounce within Downtrend (SPY, QQQ, IWM)
  • Oil Breaks Short-term Support ($WTIC)
  • Energy SPDR Hangs on to Uptrend (XLE)
  • Oil & Gas Equipment & Services ETF Overshoots (XES)
  • Commodities Hit Across the Board
  • Coffee Battles to Hold its Breakout (JO)
  • A Third Wedge Unfolds for Palladium (PALL)
  • Healthcare SPDR Show Relative Strength and Bull Flag (XLV)
  • Biotech ETFs Extended after big Moves (XBI, IBB)
  • 1Aerospace & Defense ETF Holds Up Better than SPY (PPA)
  • Global Clean Energy ETF Holds above Stop (ICLN)

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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