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 – 21 June: Market-ETF Report and Signal-Rank Table Update
- Wednesday – 22 June: Market-ETF Video and Market Regime Update
- Thursday – 23 June: Market-ETF Report and Signal-Rank Table Update
- Saturday – 26 June: ETF Signal and Rank Table
Breadth Model Negative and Yield Spreads Elevated
The Composite Breadth Model remains negative (-5) and yields spreads are elevated. As such, the Market Regime for stocks is bearish (bear market). Even so, stocks are short-term oversold and ripe for a bounce (more on that with the SPY chart). The 5-day SMA for the S&P 500 is 15.77% below the 200-day SMA and in a strong downtrend. Just 10.93% of S&P 500 stocks are above their 200-day SMAs, which is the lowest level since the covid low when the indicator dipped below 5%.
Advance-Decline Percent plunged below -80% for three days straight in the S&P 500, Nasdaq 100 and S&P MidCap 400. This means more than 90% of stocks in each index declined and less than 10% advanced (10% advancers less 90% decliners equals -80%). This is some seriously strong selling pressure that smacks of a washout or selling climax that could lead to a short-term low. August 24th, 2015 was the last time S&P 500 AD Percent ($SPXADP) exceeded -80% three days in a row. This led to a short-term bounce in late August, but there was a test of the August low in late September.
TopTradersUnplugged
I am not a conspiracy theorist, but I am a trend-follower and I listen to the TopTradersUnplugged podcasts on weekends. This weekend I listened to Grant Williams and Peter Atwater on their Global Macro series. These podcasts covered a wide range of subjects including Fed confidence, deglobalization, the fourth turning, social mood and cycles (Felix Zulauf). It is very interesting stuff that feeds into the bear market narrative (confirmation bias). It also fits in with Thursday’s commentary using Dow Theory and Elliott Wave. As interesting as it is, this stuff is very macro and secondary to the trend and Composite Breadth Model. I am bearish now, but will keep an open mind and turn bullish when the evidence says so.
Decline Steepens as SPY Becomes Oversold
SPY, QQQ and IWM are short-term oversold after sharp declines, but they are in long-term downtrends and we are in a bear market. These conditions could give way to a bounce, but I am not interested in short-term bullish reversals when the bigger trends are down and we are in a bear market. Also keep in mind that oversold conditions are a result of strong selling pressure and this is more negative than positive over the medium and long term.
The first chart shows SPY with a falling channel from January to April and then a steeper falling channel from April to June. With a 12 percent decline in eight days, the ETF hit the lower line of the steeper channel to become oversold. We do not need this lower line to know SPY is oversold because a 12% decline in eight days creates an oversold condition. Oversold conditions suggest that SPY is ripe for a bounce or consolidation. Broken support and the 50% retracement line mark the first resistance/reversal zone in the 390 area.
QQQ is also short-term oversold after a 13.7% decline in ten days (3 to 16 June). Bounce targets are not as clear on this chart, but any kind of target should be taken with a grain of salt. In addition, QQQ, IWM and the other major index ETFs are highly correlated. They will bounce if SPY bounces.
You can learn more about my chart strategy in this article covering the different timeframes, chart settings, StochClose, RSI and StochRSI.
IWM is also short-term oversold after falling 13.5% the last eight days. IWM also formed an inside day from Thursday to Friday. An inside day shows short-term indecision that can also foreshadow a reversal. “Short-term” is the key word here because the bigger trend is down.
Slim Pickings and Lots of Downtrends
There are 168 stock-based ETFs in the ETF Master List (274 ETFs) and only ten are in uptrends (Trend Composite > 0). Nine of the ten are energy-related (XLE, RHE, PSCE, XES, XOP, OIH, FCG, CRAK, IGE) and the other is the Metals & Mining SPDR (XME). Of the remaining 106 ETFs, only ten are in uptrends (DBC, DBE, DBA, CORN, SOYB, CANE, WEAT, ECH, GXG, UUP). These ten represent energy, agriculture and the Dollar. That’s it. The only uptrends out there are in energy, agricultural commodities and the Dollar. ETFs with ALLW in the first column are part of the All Weather 50 List and only seven of these are in uptrends.
The ETFs in uptrends are also not immune to selling pressure. The StochClose (125,5) column reflects the level of the current close relative to the six month high-low range. Readings above 90 mean price is near a six month high, while readings below 10 mean price is near a six month low. The energy ETFs fell sharply last week and their StochClose readings are in the 60s, which means they are just above the mid points of their six month ranges.
West Texas Intermediate Enters Support-Reversal Zone
$WTIC, DBE
The energy-related ETFs are driven by the price of oil and oil fell some 10% from its June high. This decline was sharp, but oil is entering a potential support-reversal zone (blue shading). Broken resistance levels turns support and the decline retraced almost 50% of the April-June advance. 50% retracements fit with the upward sequence of two steps forward and one step backward. This is an area of interest for a possible short-term bounce or reversal.
The DB Energy ETF (DBE) holdings are from the energy complex: gasoline 50%, oil 39% and Nat Gas 11.5%. Nat Gas demand is very seasonal because much is used for heating in the winter. Of course, there are many other factors in play, especially with the war in Ukraine. Also note that Natty is known as the widow maker in the commodity markets because of its volatility. DBE hit a new high and then fell 8% the last six days. It is not short-term oversold yet and has yet to reach its first support-reversal zone in the 26.27 area (blue shading). The trend is still up, but it does not have a setup working.
Energy-base Stock ETFs Get Hit Hard
XLE, XES
Oil and stocks fell the last six to eight days and this was a lethal combination for the energy-related ETFs, which fell 20 plus percent (XLE -20%, XES -24%, XOP -23%, FCG -23.5%). They are still in uptrends, but not immune to broad market weakness, especially when oil falls. I still view the decline in oil as a correction within a bigger uptrend. The energy-related ETFs are also in uptrends and some are nearing potential reversal zones. The first chart shows XLE plunging to the March-April lows as it instantly retraced 50% of the December-June advance. This is a support-reversal zone and the ETF is also short-term oversold as the Momentum Composite dipped to -4. A short-term mean-reversion setup is here and I am watching for firming or some sort of short-term bullish catalyst. This could be a short-term candlestick pattern or a StochRSI pop above .80.
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
Technical analysis is subjective, which means you can pretty much see whatever you want to see on a price chart. There is a Double Top from April to June and a break below the intermittent low to confirm the pattern (green shading). XES is also short-term oversold and in a potential support-reversal zone, which is marked by broken resistance and the 50-67% retracements. Oil is in an uptrend and the long-term trend for XES is up so I will err with the bulls on this one. As with XLE, XES is in the falling knife stage so I am waiting for signs of support or a short-term bullish reversal.
Agriculture ETFs Pull Back within Uptrends
DBA, JO, CANE, WEAT
The DB Agriculture ETF (DBA) remains in a consistent and persistent uptrend with higher highs and higher lows since the July 2021 breakout. This uptrend is powered by corn, soybeans and wheat, although the latter remains in pullback mode. A bullish setup remains with DBA as it pulled back with a falling wedge, which is a typical pattern for a correction within an uptrend. The wedge is still falling because we have yet to see a breakout or a StochRSI pop above .80. Watch for a close above 22 to trigger a breakout.
The Wheat ETF (WEAT) surged on Thursday and then gave it all back with a 4.2% decline on Friday. There was also a StochRSI pop above .80 on Thursday and then a sharp drop on Friday for a whipsaw. News flow is adding to the volatility because there is a lot of wheat locked up in Ukraine. Overall, the trend is up and WEAT appears to be consolidating after a surge from 7 to 12 earlier this year. A consolidation after a strong advance is a bullish continuation pattern. There are swings within this consolidation and the current swing is down (falling flag from late May to June). A break above 11.25 would reverse this fall and be bullish.
The Sugar ETF (CANE) is testing support from broken resistance and the May low (blue shading). This area is a possible reversal zone and the ETF was oversold last week as the Momentum Composite dipped to -4. Watch for a break above 9.6 on the price chart or a StochRSI pop above .80 for a short-term momentum thrust.
The Trend Composite is negative for the Coffee ETF (JO), but I am bullish on JO after the wedge breakout two weeks ago. Prices fell back after this breakout with a sloppy falling flag taking shape. We cannot expect patterns to be picture perfect. Instead, we need to see if the pattern captures the “essence” of a flag: pullback after surge. JO surged from 24-May to 1-June and then pulled back. A break above last week’s high would reverse the fall from this flag and argue for higher prices.
You can learn more about exit strategies in this post,
which includes a video and charting options for everyone.
Gold Channels Lower with Short-term Volatility
GLD
Gold is all over the place, both long-term and short-term. Long-term, GLD hit a new high in March (>190), but remains below its June 2021 high (~180). Short-term, GLD crossed the 170 level four times in the last six weeks. Overall, the ETF appears to have lots of support in the 165-168 area (green shading). Even so, the immediate trend is down with a falling channel defining this downtrend. The highs from late May and June mark resistance at 175 and a breakout here is needed to reverse the downtrend.
Three ETF Groups Showing Relative Chart Strength
ICLN, LIT, XBI
The May low is a benchmark low that almost all stock-based ETFs broke in June (lower lows). As such, ETFs that held above their May lows are showing relative chart strength. Relative strength can foreshadow absolute strength, but can also be a dangerous siren song when the long-term trend is down and in a bear market. Be careful out there. Having clarified the situation, there are three stock-based ETF groups showing some short-term relative chart strength: clean energy, lithium battery and biotech.
The first chart shows the Global Clean Energy ETF (ICLN) within a long-term downtrend, but showing relative strength because it held well above the May low. In fact, the June decline retraced around 2/3 of the prior surge and the stock actually firmed around 18 last week. A break above last Wednesday’s high would reverse the short-term downswing (red line).
Before getting too excited, keep in mind how quickly and violently these high-beta ETFs can change direction. ICLN had a similar setup in early May and failed to hold the seemingly strong breakout on May 5th. The key here is to plan your trade before taking the trade and then trade according to that plan. A breakout from the current pattern and a subsequent close below 18 would signal a failure.
The Lithium Battery Tech ETF (LIT) is somewhat related to the clean energy group. The next chart shows LIT with a 25% surge and 50% retracement to the prior breakout. This makes the 70 area a potential support-reversal zone. LIT is already responding with a surge on Friday and bid for a breakout. A close below 70 would negate this breakout. Note that volatility is very high with these ETFs and they can move 5 to 10 percent in a week (either way!).
The Biotech SPDR (XBI) did not hold above its May low, but it did not break the May low and held up better than SPY and QQQ. XBI remains in a downtrend defined by the falling channel. The ETF dipped below the lower line in May and bounced back above 70. The ETF then tested the lower line in June and surged on Friday. Notice that XBI broke above Wednesday’s high with this surge. This shows short-term relative strength because not many ETFs exceeded Wednesday’s high on Friday. Again, keep in mind that XBI is in a downtrend and this is bottom picking, which means the odds of success are below average.
Previous Commentary
Thursday’s commentary (here) covered the following:
- Basic Tenets of Dow Theory
- Global Financial Crisis and Bear Market
- Dotcom Bubble Burst and Bear Market
- Current Phase/Wave Counts
- Extreme Oversold with Breadth Indicators
- A Bear Market Until Proven Otherwise
You can learn more about my chart strategy in this article covering the different timeframes, chart settings, StochClose, RSI and StochRSI.