Today’s report will start with the Composite Breadth Model and some words on the Market Regime because this is the dominant force at work for stocks and stock-based ETFs. Some stock-based ETFs are featured in this report because they are either in uptrends on the price chart, have positive Trend Composites or held their January-March lows (did not break down). Even so, I am wary of stock-based ETFs because the Market Regime is bearish and stocks are highly correlated. In other words, another downswing in the major index ETFs would likely weigh on stock-based ETFs. ETFs related to energy and agricultural commodities have the most consistent uptrends. ETFs related to materials and defense are holding up better than most, but still vulnerable to broad market swings.
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.
Weekly Scheduling
- Tuesday – 7 June: Market-ETF Report and Signal-Rank Table Update
- Wednesday – 8 June: Market-ETF Video and Market Regime Update
- Thursday – 9 June: Market-ETF Report and Signal-Rank Table Update
- Saturday – 11 June: ETF Signal and Rank Table
Breadth Model and %Above 200-day SMA
Let’s start off with the Market Regime for stocks. The Composite Breadth Model is negative, the 5-day SMA for the S&P 500 is some 7% below the 200-day, only 34% of S&P 500 stocks are above their 200-day SMAs and yield spreads are elevated. Clearly, the evidence is more bearish than bullish for stocks. There will still be counter-trend bounces, but the bulls face a serious headwind and risk levels are above average in the stock market.
SPY Hits First Resistance/Reversal Area
SPY surged 6.6% in five days at the end of May and then stalled the last five trading days. This bounce, while seemingly strong, is still considered a counter-trend bounce within a bigger downtrend. The red dotted lines mark the falling channel to define this downtrend with lower lows and lower highs. SPY became oversold after dipping below the lower line and bounced back to broken supports (blue shading). Broken support turns into future resistance and this bounce also retraced 50% of the prior decline.
A typical counter-trend bounce retraces one half to two thirds of a prior decline. Given resistance from broken support and the bearish market regime, the current bounce could be near its end point. Sometimes, such as early February (black arrow), we see a short-term pop or breakout and then a reversal. The key point is that the path of least resistance is down and I expect this short-term counter-trend bounce to fail (reverse).
The next chart shows QQQ with a bounce back above 300 in late May and a consolidation the last five days. Notice that two inside days formed on Friday and Monday (light blue oval). Inside days note indecision that can foreshadow a reversal. Basically, QQQ surged off the May low, gained 2.7% last Thursday and then suddenly turned indecisive with two inside days. An inside day is similar to a harami candlestick pattern. A break below Thursday’s low would be short-term bearish and argue for a test of the May lows, or even a break.
You can learn more about my chart strategy in this article covering the different timeframes, chart settings, StochClose, RSI and StochRSI.
Oil is the Strongest of All
$WTIC
There is no change in oil as it continues to work its way higher after the early May breakout. The larger wedge is the bullish continuation pattern, the early May breakout signaled a continuation of the bigger uptrend and a move to new highs is expected. Notice that oil fell 9% in two days just before it surged from 100 to 118 (yellow area). This was a classic head-fake that created a short-term oversold condition and led to the mean-reversion bounce. Sharp 2-3 day pullbacks should be considered opportunities when the bigger trend is up. Something similar is happening in WEAT, which is featured further below.
The bottom window shows the DB Energy ETF (DBE) forming a pennant consolidation into mid May, breaking out and advancing to new highs. Oil, nat gas and gasoline are the leading commodities right now, and DBE captures all three. It is short-term overbought after a 15% advance since May 18th and there is no setup on the chart right now. Just a strong and leading uptrend.
Energy ETFs Follow Oil Higher
XES, PSCE, FCG
There is no change in the energy-related ETFs, which are leading the market because of strength in the energy complex (oil, nag gas, gasoline). XLE is the strongest sector by far and close to a new high. The Oil & Gas Equipment & Services ETF (XES) and Small-cap Energy ETF (PSCE) corrected from mid April to mid May with typical retracements and bullish continuation pattern. They broke out of falling flag/wedge patterns in mid May and continued higher into June.
The Oil & Gas Exploration & Production ETF (XOP) and Natural Gas ETF (FCG) formed triangle like consolidations and broke out in the latter part of May. Both of these recorded new highs on Monday. Again, there are no setups right now, just strong and leading uptrends.
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
Agricultural ETFs with Uptrends
DBA, WEAT, CANE, JO
Pullbacks are not uniform. Some pullbacks are short (one to two weeks) and some are longer (two to eight weeks). Some retrace 33%, some 38%, some 50% and some 67%. Some form falling flags, falling wedges or channels and give us a clear breakout point to watch. Some do not form identifiable patterns. Bottom line: pullbacks come in all shapes and forms.
The important thing to remember is that a pullback within an uptrend is a bullish continuation setup. The bigger uptrend is expected to prevail at some point and the pullback is deemed an opportunity to partake in this uptrend. In theory, the majority (60%) of pullbacks should result in successful trades. Some will fail. Some pullbacks will even extend lower and reverse the bigger uptrend.
ETFs related to energy and agricultural commodities have the most consistent and persistent uptrends right now. This means they consistently forging higher highs and higher lows with normal pullbacks. The chart below shows the DB Agriculture ETF (DBA) with an uptrend for over a year and different pullbacks within this uptrend. DBA hit a new high in mid May and pulled back with a small falling wedge into June. This is a pullback within an uptrend and still deemed an opportunity. It is now time to watch for a short-term bullish catalyst, such as a short-term breakout at 22.5 or a StochRSI pop above .80.
The next chart shows the Wheat ETF (WEAT) with sharp declines on 31-May and 1-June (two days). These declines pushed WEAT below the lower line of the falling flag, but the overall decline was still viewed as a pullback within a bigger uptrend. In addition, sharp 2 to 3 day declines within uptrend are more like an opportunity than a threat. WEAT firmed last Thursday-Friday and surged 5% on Monday. A short-term breakout is in the making here.
The next chart shows the Sugar ETF (CANE) with a surge in mid May, a small wedge into June and a short-term breakout on Monday.
The next chart shows the Coffee ETF (JO) with a falling wedge breakout last week. The wedge is deemed a correction after the 70% advance from July to February. This breakout signals an end to the correction and a resumption of the bigger uptrend.
Materials-Related ETFs Hold Up Relatively Well
XLB, RTM, MOO, XME
Strength in commodities is a clear theme in the markets right now and this is extending into the materials sector, steel and agribusiness. The latter two industry groups are part of the materials sector. The Materials SPDR (XLB) is a cap-weighted sector dominated by large chemical companies (69%). The EW Materials ETF (RTM) is an equally weighted sector ETF, but still dominated by chemical companies (60%). The first chart shows RTM pulling back within a choppy uptrend and getting a breakout with the surge at the end of May. A close below 177 would argue for a re-evaluation.
The second chart shows XLB bouncing off of range support with a big move since mid May. XLB qualifies for my focus list because it held the February-March lows and shows relative strength when others were breaking to new lows. The ETF broke out in mid May, fell back after the breakout and then broke out of the channel with a surge the last two weeks.
The Agribusiness ETF (MOO) fell sharply from mid April to mid May, but held above the February low and therefore remains on my focus list. It also recorded a new high in April. The ETF reversed the downswing with a breakout in mid May and extended after this breakout. The blue dashed lines show the alternative pattern, which is a potentially bearish rising wedge. A close below 95 would break wedge support and be short-term bearish. Note that an alternative pattern is one that would prove the current pattern or breakout wrong. We need a level to admit being wrong and setting such levels should be part of our trading plan.
The Metals & Mining SPDR (XME) is 44.8% steel and part of the materials sector. XME hit a new high in April and fell back to the breakout zone in May as it retraced two thirds of the prior advance. This retracement amount and return to broken resistance are normal for pullbacks within uptrends. XME broke out of the falling channel in mid May and continued higher the last few weeks. The bulls get the benefit of the doubt here, but I am watching closely because the Market Regime is bearish. The alternative pattern is a rising flag and a close below 52 would be short-term bearish.
Aerospace & Defense ETFs Extend after Breakouts
PPA, ITA
The Aerospace & Defense ETFs (ITA, PPA) made the cut because they held support zones in May and did not break to 52-week lows. The ability to hold support when others are breaking down shows relative strength. ITA and PPA also recorded 52-week highs in April. They are not in consistent and persistent uptrends, but are holding up better than most stock-based ETFs. These two reversed their downswings with short-term breakouts in mid May and continued higher the last few weeks. The advance is too sharp for an alternative pattern so I am using the ATR Trailing Stop, which is 2 ATR(22) values below the highest close since the mid May breakouts. Notice how this stop rose as prices moved above the mid May high. A close below these trailing stops would call for a re-evaluation.
You can learn more about exit strategies in this post,
which includes a video and charting options for everyone.
DB Base Metals ETF Holds Breakout as Copper Surges
DBB, CPER
The DB Base Metals ETF (DBB) remains in an uptrend overall and with a short-term breakout in mid May. DBB forged a new high in March, held above the November-December lows in mid May and the Trend Composite is still positive. The short-term breakout in mid May is also holding as the ETF works its way higher the last few weeks. Now is the time to set the level that will prove my bullish stance wrong. The ATR Trailing Stop is at 22.6 and this matches the late May low (green line). It is also possible that a rising flag is forming. A close below 22.6 would trigger the ATR Trailing Stop and also confirm the rising flag, which is a short-term bearish continuation pattern. Such a move would call for a re-evaluation.
The Copper ETF (CPER) fell to range support in mid May and reversed its downswing with a short-term breakout on May 19th. The ETF surged last Thursday with a 5.3% advance and this carried the ATR Trailing Stop up to 26.55. Copper is quite volatile and some normal volatility could trigger this stop because it is quite close now. This is where your personal preferences come into play. Short-term traders and those feeling nervous about the markets might want a tight stop. Traders wishing to avoid whipsaw may opt for a wider stop and use the late May close (green line at 25.91). I will re-evaluate on a close below the 26-May close.
Gold Stalls after Breakout
GLD
The Gold SPDR (GLD) chart has characteristics similar to DBB and CPER. GLD hit a new high in March, held above the winter lows in mid May and reversed its downswing with a breakout around May 23rd. The breakout is largely holding, but GLD has not followed through with further gains. The ATR Trailing Stop is at 170.3 and I would re-evaluate on a close below 170.
Palladium ETF Remains with Bullish Setup
PALL
The Palladium ETF (PALL) remains on the watch list because it has a bullish setup. The 100% advance to a new high is deemed part of a bigger uptrend and the falling wedge is considered a correction after this massive advance. PALL surged from May 13th to 17th and then stalled in the 180-190 area. A break above 195 would signal an increase in buying pressure and be bullish.
Platinum ETF Leads with Break above May Highs
PLTM
The Platinum ETF (PLTM) was featured last Thursday because it was outperforming the other metals over the last four to five weeks. CPER came to life last Thursday and is keeping up with PLTM now. On the price chart, PLTM held the support zone in late April and reversed its downswing with a breakout in early May. The ETF fell back into mid May, held above the late April low and broke resistance levels with a surge the last five trading days. The red line shows the ATR Trailing Stop for reference.
You can learn more about my chart strategy in this article covering the different timeframes, chart settings, StochClose, RSI and StochRSI.