Market and ETF Report – SPY Near Reversal Zone, XLU Holds Up, XLP Gets Counter-Trend Bounce, Home Construction Shows Relative Strength (Premium)

Small-caps are outperforming large-caps over the last one to two weeks because large-caps stalled and small-caps continued higher. Even so, I am not following the siren song of small-cap relative strength and am more concerned with short-term relative weakness in large-caps. We will look at charts for SPY and IWM first. Analysis then turns to the defensive groups (Utilities, Staples, Healthcare) and we finish with a dive into tech and consumer discretionary ETFs.

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.

SPY Remains Close to Resistance-Reversal Zone


There is no change in SPY and QQQ as they stalled the last seven trading days. The stall in SPY looks like a flag and a breakout would argue for a continuation of the 6.6% surge that preceded the flag. I am not interested in this setup because the bigger trend is down and the Market Regime is bearish. Also note that SPY is trading at a resistance/reversal zone marked by broken supports and the 50% retracement (blue shading). Just ahead in the 430 area, we have another resistance/reversal zone marked by the early May highs and 67% retracement. Even if we see a flag breakout, I expect resistance and/or a reversal in the 420-430 area because the path of least resistance is down. As such, I am more inclined to sell the bounces and short-term breakdowns, as opposed to buying the dips and breakouts.

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

Small-caps Outperforming the last Two Weeks


The Russell 2000 ETF (IWM) and small-caps are actually showing short-term relative strength. While SPY and QQQ stalled the last seven days, IWM edged higher and exceeded the late May high. Nevertheless, this is also considered a counter-trend bounce within a bigger downtrend. This bounce is also nearing a resistance-reversal area marked by the 50-67% retracement zone and early May highs. Counter-trend bounces typically retrace half to two thirds of the prior decline.

Keep in mind that relative performance is a two-sided coin. One ETF is outperforming and the other is underperforming. IWM is outperforming SPY over the last two weeks, but still underperforming since the mid November high (long-term). Short-term relative strength in IWM means short-term relative weakness in SPY. I would be more concerned with relative weakness in SPY right now. Small-caps are the tail and large-caps are the dog. The tail does not wag the dog!

Treasury Bond ETF Continues Lower as 10yr Yield Turns Up


The 20+ Yr Treasury Bond ETF (TLT) continued its march lower as it broke the rising wedge on May 31st to signal a continuation lower. TLT broke down in early January and forged at least five small bearish continuation patterns this year. Bonds are a natural alternative to stocks, but they are not attracting buying pressure this year. The wedge break signals a continuation lower and new lows are expected.

The 10-yr Treasury Yield moves in the opposite direction of TLT (bonds fall and yields rise). $TNX exceeded 3% in early May, corrected with a small falling wedge and broke out of this wedge on May 31st. The breakout ends the short pullback and signals a continuation higher.

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

Dollar ETF Turns Back Up


The Dollar Bullish ETF (UUP) seems to like rising rates as it also ended its short correction and turned back up over the past week. The Dollar perhaps even benefits from a falling stock market and the safe-haven trade as an alternative to the Euro.

Utes and Dividends are Holding Up Well


As noted in Wednesday’s video, the Utilities SPDR (XLU) is one of two sector SPDRs that are in uptrends. I think you can guess the other one (there is a big E in the symbol). This means nine of the eleven are in downtrends. You do not need to be a mathematician to realize that the vast majority of sectors are in downtrends and this supports the stance for a bearish Market Regime. XLU is still in an uptrend as it hit a new high in April, experienced a normal 50-67% retracement into May and broke out in late May.

As an aside, note that 38% of electric utilities in the US generate their electricity using natural gas. Other sources are: coal 22%, nuclear 19%, wind 9.2%, hydro 6.3% and solar 2.8% (Source: EIA). I am not going to play a fundamental card here, but natural gas prices in the US more than doubled from January to June (3.60 to 8.31).  The Utilities sector is a defensive sector, but not immune to the wrath of inflation or a bear market.

The Select Dividend ETF (DVY) is one of the most defensive broad-market ETFs and it remains in an uptrend. Utilities and financials are the biggest sectors, but energy and materials are also present. The ETF is in a choppy uptrend since the August breakout. Most recently, DVY hit a new high in April, retraced a normal 67% on a pullback into May and surged with the market in late May. It is close to a 52-week high and leading overall. Note that SPY is down 13.64% year-to-date and DVY is up 5.5%.

Healthcare SPDR Holds Short-term Breakout


The Healthcare SPDR (XLV) is one of these ETFs that is in an uptrend of some sorts because of the higher highs, but the uptrend lost its consistency because the pullbacks extended back to the prior lows. XLV is a defensive oriented sector and holding up better than the broader market because it did not break its January-February lows. The ETF turned up in mid May and reversed its downswing with a breakout on May 16th (green arrow) and this breakout is largely holding. At this point, I am looking for the level that will prove this breakout wrong. The alternative pattern is a rising flag over the last four weeks. A flag break would be short-term bearish and negate the mid May breakout. I could set my key level at this week’s low, but that may be too tight and invite a whipsaw so I will use last week’s low (green line). A close below 128 would confirm the bearish flag and negate the mid May breakout.

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

Counter-Trend Bounces for Staples and Food-Beverage


The Consumer Staples SPDR (XLP) and the Food & Beverage ETF (PBJ) are also defensive and typically hold up better in a bear market. However, as recent price action shows, they are not immune to a bear market or inflation. The first chart shows XLP breaking down with a sharp decline in mid May and recovering with a bounce in late May. This bounce is considered a counter-trend bounce within a new downtrend. This bounce is also running into its first resistance-reversal zone around 75 (broken trendline and 50% retracement). Even if XLP were to break out of the seven day consolidation, I would still expect a reversal somewhere in the 76 area because the bigger trend is down and we are in a bear market.

Counter Trend Bounces in Tech ETFs


QQQ, the Technology SPDR (XLK) and the tech-related ETFs are all in downtrends and most hit new lows in May. Note that XLK is the largest sector in the S&P 500 (27%) and QQQ stocks account for around 35% of the S&P 500. An ETF hitting a new low is clearly in a long-term downtrend so a bounce from this low is considered a counter-trend bounce. One day we will see a move that reverses the downtrend, but the odds favor the direction of the trend until it is reversed.

The first chart shows the Software ETF (IGV) with a breakdown in early December and a falling channel defining the downtrend this year. IGV was oversold in May and got a nice oversold bounce, but this bounce is running into a resistance-reversal zone in the 310-320 area. I am using zones because picking a potential reversal level is an educated guess. The swing since mid May is up with a small rising channel forming. A break below Tuesday’s low (green line) would reverse the swing within this rising channel.  A break below the channel line would argue for a continuation lower.

The next charts show the Mobile Payments ETF (IPAY), Semiconductor ETF (SOXX), and Autonomous EV ETF (DRIV) with long-term downtrends and counter-trend bounces. As noted before, I am not a bottom picker and will wait for a trend changing move before putting these ETFs on my radar for bullish setups.

Consumer Discretionary and Retail in Strong Downtrends


Market bottoms and bull markets often emerge when we start seeing breakouts and leadership from tech and consumer discretionary related ETFs. Tech represents the high-beta trade and the appetite for risk. Consumer Discretionary is the most economically sensitive sector and reflects the health of the consumer. Note that retail, autos and housing feature in this sector. The tech groups were shown above and we will now look at the EW Consumer Discretionary ETF (RCD), Retail SPDR (XRT) and Home Construction ETF (ITB). As a litmus test for the economy, I prefer the EW Consumer Discretionary ETF because the Consumer Discretionary SPDR (XLY) is dominated by heavy weightings in Amazon (20.6%) and Tesla (17.8%).

The chart below shows the EW Consumer Discretionary ETF within a clear downtrend that is defined by the falling channel. The ETF is in the midst of an oversold bounce, but this bounce started from a 52-week low and is simply alleviating oversold conditions. As with SPY, RCD consolidated the last seven days with a tight range. While a breakout from this consolidation would be short-term bullish, I  would expect resistance in the 125-130 area. The second chart shows XRT with similar characteristics.

Home Construction ETF Shows Relative Strength


The Home Construction ETF (ITB) hit new 52-week lows in May, but is holding up much better than RCD, XRT and SPY since early April. SPY is down around 9% since April (47 trading days) and ITB is actually up .42% since then. RCD, XRT and SPY fell sharply in April-May and are nowhere near their early May highs here in June. ITB, in contrast, did not fall that hard in May and is fairly close to its April-May highs (red shading). ITB is showing relative strength. The ETF is still in a downtrend, we are still in a bear market and rates are rising. Nevertheless, sources tell me that there is a housing shortage in the US. ITB surged in late May and consolidated into June. A short-term breakout here would increase the chances for a break above the May high.

Previous Commentary and Video

Wednesday Market and ETF Video (here)

Market Regime Update with Breadth Model and Yield Spreads (here)

Topics Covered in Tuesday’s Report (here)

  • SPY Hits First Resistance/Reversal Area
  • Oil is the Strongest of All ($WTIC)
  • Energy ETFs Follow Oil Higher (XES, PSCE, FCG)
  • Agricultural ETFs with Uptrends (DBA, WEAT, CANE, JO)
  • Materials-Related ETFs Hold Up Relatively Well (XLB, RTM, MOO, XME)
  • Aerospace & Defense ETFs Extend after Breakouts (PPA, ITA)
  • DB Base Metals ETF Holds Breakout as Copper Surges (DBB, CPER)
  • Gold Stalls after Breakout (GLD)
  • Palladium ETF Remains with Bullish Setup (PALL)
  • Platinum ETF Leads with Break above May Highs (PLTM)

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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