Market and ETF Report – Staying with a Narrow Focus, Leaders Firming and Bounces after Sharp Pullbacks (Premium)

Separating the Leaders from the Laggards

The Market Regime is bearish and this means there is a headwind for stock-related ETFs. At the very least, we should be extremely selective and reduce exposure to stocks. Even though we will still have sharp oversold bounces, risk levels remain above average. I still prefer non-stock ETFs, except for bonds. Today’s report will highlight some stock-related ETFs that are still in uptrends and holding up relatively well during the current pullback. 

We can compare relative performance using recent peaks and troughs. SPY, which is the market benchmark, formed a lower high from January to March and tested its March lows here in late April. Stocks and ETFs that recorded higher highs in March and/or held above their March lows during the current swoon are holding up better than SPY. As the chart below shows, the Semiconductor ETF (SOXX) is weaker than SPY, and the Metals & Mining SPDR (XME) is stronger.

I realize that if the S&P 500 SPDR (SPY) surges, the Semiconductor ETF (SOXX) is likely to surge as well and even outperform SPY. Even so, I use a filtering process and the first filter is for trend. SOXX is in a downtrend and gets filtered out. XME is in an uptrend and gets a second look. This is all part of having a strategy. As such, the ETFs below will fit the strategy: they will be in long-term uptrends and showing leadership in some way shape or form.

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.

Sad News and Scheduling

The report schedule for the next week will be a bit different because I am attending a family funeral. My mother (85) had a sudden heart attack on Easter Sunday evening and passed away the following Monday. Fortunately, we had a family zoom on Easter morning and saw her in good spirits. I am working in the US for now and will publish Market/ETF Reports before 10PM ET on the following dates:

  • Sunday, May 1
  • Wednesday, May 4
  • Thursday, May 5

Many thanks to all those sending their condolences. I greatly appreciate it.

Healthcare SPDR Pulls Back within Uptrend (XLV)

The chart below shows the Healthcare SPDR (XLV) with a new high in early April (uptrend and leader). The ETF then fell sharply with the rest of the market, but held above its March lows and showed relative strength (less weakness). There was some overshoot on the pullback, which is normal considering overall volatility. Allowing for some leeway The ETF retraced 50-67% of the prior advance with a return to the breakout area. This is the first area to watch for support and/or an end to the current pullback. Also note that the Momentum Composite dipped to -3 twice and became oversold.

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

The $1 Million Question

How do we time a pullback within an uptrend? Some pullbacks form tradable falling flags or wedges with a clear short-term resistance level to watch for a breakout. Sometimes we see bullish candlestick patterns emerge after a pullback and can identify a short-term breakout. Sometimes we do not get much to go on, which is the case with many ETFs now. They have pullbacks working within uptrends, but not always with a short-term reversal pattern and this makes us look harder for short-term clues.

The chart below shows XLV and the green arrows show when the Momentum Composite became oversold (dipped to -3 or lower). Notice how XLV became oversold in September and continued lower for a few more weeks. The trendline is not much help, but there is a three candlestick reversal working the last three days. A follow through breakout at 135 would be short-term bullish. Chartists can also watch for a StochRSI pop above .80 to signal a short-term momentum thrust.  

Materials SPDR Gets Short-term Breakout after Pullback (XLB)

The next chart shows the Materials SPDR (XLB) with a choppy uptrend the past year. The ETF challenged its January high in mid April and then fell sharply for four days. Despite a very sharp decline, the move retraced around 2/3 of the prior advance and returned to the breakout zone (blue shading). This is normal stuff for a pullback within a bigger uptrend. XLB firmed with an inside day on Tuesday and then broke short-term resistance on Wednesday.  

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

Infrastructure ETF Falls to Prior Breakout (IFRA)

The Infrastructure ETF (IFRA) chart is similar to the XLB chart above, which makes some sense because the Materials sector accounts for 19.8%. IFRA is a real hodge-podge with 42.6% Utilities, 28% Industrials and 7.9% Energy. IFRA hit a new high in mid April and then fell 5% in three days. This decline retraced around 2/3 of the prior advance and returned to the early March breakout zone, which turns into support. Short-term, there is also a three candlestick reversal (blue oval): long black candlestick, inverted hammer and big gain. This what I mean when I say that we have to look hard for short-term clues. A reversal could be in the making here.

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

Metals & Mining SPDR With Shallow Retracement (XME)

The Metals & Mining SPDR (XME) was leading the market with a new high in mid April and then fell off a cliff with a sharp three-day decline (-13%). Again, there is no flag or wedge, but the Momentum Composite dipped to -3 and an ETF is clearly oversold after a 13% decline in three days. XME firmed for a few days and then edged higher on Wednesday. I do not see a short-term pattern to work with, but this is still a pullback within a bigger uptrend and a bullish setup. You may want to consult a 30min chart.

Still Bullish on Oil ($WTIC, DBE)

West Texas Intermediate ($WTIC) fell back over the past week, but the chart remains with a bullish configuration. There are three setups working. First, the thick blue lines show a large falling wedge in March-April. This is a consolidation after a big advance and a bullish continuation pattern. Second, there are the swings within the pattern and WTI reversed the April falling wedge with a surge-breakout two weeks ago. Third, there is a small falling wedge the last seven trading days and a short-term breakout working with the advance on Tuesday. A lot can still happen within the biggest wedge because volatility remains high all around, but the chart is still bullish.

XLE and XES Bounce off Support

Angled trendlines define the rate of ascent or descent based on their steepness. A trendline break simply signals that price did not maintain the rate of ascent. The chart below shows XLE with a ~45 degree trendline and a break with a sharp three day decline last week. It would be very hard to maintain such a steep ascent and I do not view this trendline break as bearish. XLE fell back to support from the March lows, firmed and moved higher on Thursday. XLE was not exactly oversold, but this was a short pullback within an uptrend. Basically, XLE went on sale as they took 8% off the price. The second chart shows XES with similar characteristics. XES is the high-beta play on oil and the oil patch.

Gold Remains with Bullish Chart Configuration (GLD)

The Gold SPDR (GLD) fell sharply the last two weeks, but remains within a larger consolidation that I view as a bullish continuation pattern. Taking a top-down approach. The bigger trend is up because GLD hit a new high in March and the Trend Composite is positive. This means a pullback is viewed as a correction within this uptrend. A falling wedge and 50 to 67% retracement are normal for corrections, as is a return to the breakout zone (blue shading). Even though GLD fell below its March low, this is still a bullish confirmation. Timers can focus on the two week downswing (red line). A break above 178 would reverse this downswing.

Calling an Audible on the Uranium ETF (URA)

The Trend Composite turned negative for the Uranium ETF (URA), but this one is prone to steep swing and whipsaws. I am also noticing that the ETF is trading in a potential reversal zone. You know the drill. A break below 22 would negate this setup.

Back to the Drawing Board with Cybersecurity (CIBR)

The Cybersecurity ETF (CIBR) was the strongest of the tech-related ETFs, but got caught up in April selling pressure and broke down. The Trend Composite also turned negative again. I was watching a bullish wedge in the first half of April, but there was no breakout or confirmation. Instead, CIBR broke the rising channel line with a sharp decline. While I still think there is a long-term theme at work here (cybersecurity), price action is not confirming right now and CIBR is showing just how correlated it is to the broader market.

Prior Report

Wednesday’s Report Included the Following:

  • Downside Participation Expands (Advance-Decline Percent)
  • SPY is in a Downtrend
  • QQQ is Leading Lower
  • Small-caps are the Weakest of All (IJR)
  • ETFs that are Oversold within Uptrends (PPA, CPER, DBB)
  • Palladium Wins the Volatility Prize (PALL)

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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