Composite Breadth Model Bearish
The Composite Breadth Model turned bearish on February 16th and remains bearish. The 5-day SMA for the S&P 500 is below the 200-day SMA and around 65% of S&P 500 stocks are below their 200-day SMAs (~35% above). The Market Regime is bearish. At best, this means there is a strong headwind for stocks and stock-related ETFs. At worst, it means we are in a bear market in which most stocks and stock-related ETFs will decline.
You can learn more about my chart strategy in this article covering the different timeframes, chart settings, StochClose, RSI and StochRSI.
SPY and QQQ Extend Breakdowns as IJR Joins
SPY is in a long-term downtrend after the impulse move lower in January and the bearish signal from the Trend Composite on January 20th. The ETF retraced around 67% of this decline with a rising flag and broke flag support on February 11th. The continuation lower has been sharp the last four days and the ETF is set to open sharply lower on Thursday. The Momentum Composite is oversold at -4 already, but I am not interested in oversold conditions when the trend is down and the Market Regime is bearish. SPY sets the tone for the broader market and the tone is clearly bearish.
The QQQ chart is similar with an impulse move lower in January, a bearish Trend Composite signal, a flag-type bounce and a flag break on February 11th. QQQ is weaker than SPY because it retraced just 50% of the prior decline and is already below its January low. Forget about downside targets and projections. The trend is down until proven otherwise and nobody knows how long or far it will extend. QQQ sets the tone for tech and the tone is clearly bearish.
The S&P SmallCap 600 SPDR (IJR) was holding up better short-term, but also succumbed to selling pressure the last four days and broke wedge support. Note that IJR and small-caps are weaker long-term because IJR formed a lower high in January and broke below its March 2021 lows. The rising flag is a short-term bearish continuation pattern that alleviates oversold conditions and the short-term breakout argues for a continuation of the January decline.
The Trend Composite is part of the
TIP Indicator Edge Plugin for StockCharts ACP
Bonds Could get oversold Bounce
The 20+ Yr Treasury Bond ETF (TLT) and other Treasury bond ETFs are in long-term downtrends after breakdowns in early January. These breakdowns coincided with a sharp move higher in oil and increasing inflationary pressures. Bonds loathe inflation because it eats into real returns. Nevertheless, Treasury bonds are a safe haven that could attract buying interest as money moves out of stocks. The Dollar is also attracting money as a safe haven currency.
The chart below shows TLT bouncing off a zone that held in October 2019, January 2020 and March-April 2021. A break above short-term resistance (this week’s high) would reverse the short-term downtrend and call for an oversold bounce.
Note that the Inflation Protected Bond ETF (TIP) is stronger than TLT short-term because it already broke above short-term resistance. The long-term rend tremains down, but the short-term trend is up for this safe-haven play.
Energy ETFs Consolidate Near New Highs
West Texas Intermediate Futures (CL1!) were up around 5% in pre-market trading and closing in on the $100 level (at 6AM ET). Volatile Natural Gas futures (NG1!) were up almost 5% and nearing $5 on the NYMEX, but below their October highs, which are in the $6.5 area. European natural gas futures are up more than 30% today. The symbols are from TradingView, where you can chart these for free using their basic charts (affiliate link here).
The DB Energy ETF (DBE) remains in a strong uptrend and is also short-term extended. Of course, a supply crunch could lead to even more extended conditions. DBE is up some 34% since early December and near a new high on the chart, but will hit a new high on today’s open. There is saying in the oil market that that “the cure for high oil prices is high oil prices”. This is because high prices crimp demand and provide a headwind for economic growth.
The Energy SPDR (XLE) advanced some 34% from its December low and then consolidated with a falling flag. Technically, this is a bullish continuation pattern and a breakout would signal a continuation of the uptrend. Well, XLE is up some 3% in pre-market trading and could break out today.
Russian Rant
I lived and worked in Moscow in a previous life (1992 to 1996), and went to Kyiv several times. Ukrainian people are warm and friendly, and today’s events are heart breaking.
Keep in mind that today’s surge in commodities and plunge in stocks are fear-based reactions to the Russian invasion of Ukraine. This is a very fluid situation with many variables and many possibilities. Putin could go to Kyiv or could stop short and just take territory in the eastern half of the country. Note that the Dnieper river basically cuts the country in half and runs right through Kyiv. This is not much of a barrier because Russia can just go through Belarus to reach western Ukraine. In fact, there are already reports of Russian troops crossing the Belarussian border and heading towards Kyiv.
Even though Putin probably does not factor in public opinion, the Russian stock market is down 40% the last five days and Ruble fell 10%. Sberbank is down 60% the last five days. This hits ordinary Russians, and upcoming sanctions will hit the economy.
The best case scenario at this point is that Putin takes Russian speaking territory in the east and stops short of Kyiv. Kharkiv is the capital of eastern Ukraine and Russian speaking and could fall without a shot. Putin, however, seems intent on restoring the USSR and wants to overthrow the government, which means taking the capital. This will create a big dark cloud over western Ukraine, Poland, Slovakia, Romania and Europe. Note that western Ukraine will put up a fight and taking Lviv, which is near the Polish border, could get very messy. Taking Ukraine will not the same as taking Crimea. The quote below comes from Mike McKee on Bloomberg this morning:
We are in the fog of war and what you know/think is probably wrong.
DBB Remains in Strong Uptrend and Copper Holds Up
In addition to oil and natural gas, Russia also exports steel, industrial metals, precious metals, timber, wheat and fertilizers (potash). Sanctions are likely to disrupt supplies from Russia and put upward pressure on prices. See this Reuters article for some details.
The DB Base Metals ETF (DBB) remains strong with Aluminum (ALUMINUM1!) hitting new highs on the heels of a 35% advance since mid November. Zinc (ZINC1!) is up 15% since mid November, but below its October high. Copper (COPPER1!) is up 8.5% since mid November and also below its October high. Note that copper futures are up 1.8% today. There is no tradable setup in DBB as the ETF is up some 17% since mid December and will be up even more this morning.
The Copper ETF (CPER) fell 1.3% on Wednesday, but could recover that loss with a bounce today. There is no change in the overall trend. CPER broke out in late December and has been working its way higher the last two months. And I do mean working. Despite a seemingly laborious process, there is a clear uptrend defined by the rising channel (green trendlines).
The Copper Miners ETF (COPX) is stronger than the Copper ETF (CPER), perhaps because copper miners may mine more than just copper. I am not a specialist, but there must be other metals in these copper mines. COPX sports an uptrend with the rising channel since autumn and the Trend Composite turning bullish on January 11th. The ETF surged from 36 to 42 and then formed a small pennant, which is a bullish continuation pattern. A breakout would signal a continuation of this advance.
DBA Hits New High, but Agribusiness ETF Falls from High
The DB Agriculture ETF (DBA) is another one of these commodity ETFs with a strong uptrend and no short-term setup. Ukraine is a big exporter of wheat and corn. It used to be called the bread basket of the Soviet Union and Nikita Khrushchev famously promoted the production of corn.
There used to be a potash and fertilizer ETF (SOIL), but it is no longer traded. The Agribusiness ETF (MOO) is focused on other areas and not a play on fertilizer at all. The chart below shows the top 10 holdings. Nutrien (NTR) is the only pure play on fertilizer in the group. Corteva (CTVA) is a play on seeds and crop protection (pesticides). Bayer is a big chemical concern, Deere is more industrial and Idexx is biotech. Thus, don’t expect MOO to rise along with potash prices. On the price chart, MOO touched a new high two weeks ago and then fell sharply with the rest of the market. This ETF is clearly not immune to broad market weakness.
Gold Extends Surge as Trend Turns Bullish for Silver
Gold is going from a choppy uptrend to a major breakout with a move above the May high expected today. The trend was already up with the rising channel (green lines) and the Trend Composite turning bullish on November 11th, right at the November high. This is the challenge with trend-following. Signals sometimes trigger when ETFs become extended and we must endure deep pullbacks. We never know which signals will result in big trends and which will whipsaw. Trend-followers just follow the process, take the lumps when they come and catch the big trends when they evolve.
The Silver ETF (SLV) is reversing its downtrend as the Trend Composite turned bullish for the first time since July. On the price chart, the two lows around 20 represent a Double Bottom and a break above the November high would confirm this pattern. Short-term, SLV held just above the December low with the dip into early February and broke short-term resistance on February 8th.
You can learn more about exit strategies in this post,
which includes a video and charting options for everyone.
XME Consolidates after Big Breakout
The Metals & Mining SPDR (XME) broke out with strength coming from groups related to steel, aluminum and gold. The groups are shown in the upper left of the chart. While MOO and the market fell hard the last two weeks, XME held relatively strong and consolidated the last five days. Long-term, XME broke out of a big trading range and this breakout is holding. The ETF is still short-term extended after the 22% advance and I do not see a short-term setup right now.
Global Carbon ETF Gets Short-term Breakout
The Global Carbon ETF (KRBN) is in an uptrend and a market leader. The ETF broke out of a triangle consolidation in early February, fell back with a small falling wedge and broke out of this wedge with a pop the last three days.
The Momentum Composite aggregates signals in five momentum indicators. RSI(10) is oversold below 30 and overbought above 70. 20-day StochClose is oversold below 5 and overbought above 95. CCI Close (20) is oversold below -200 and overbought above +200. %B (20,2) is oversold below 0 and overbought above 1. Normalized ROC (10) is oversold below -3 and overbought above +3. Normalized ROC is the 10-day absolute price change divided by ATR(10). -3 means three of the five indicators are oversold and +3 means three of the five are overbought.
The Momentum Composite and StochClose are part of the TIP Indicator Edge Plugin for StockCharts ACP. Click here for more details.
Finance and Banks Show Vulnerability
The Finance SPDR (XLF) and Regional Bank ETF (KRE) remain in uptrends overall, but these two are not immune to broad market weakness because they fell rather sharply the last two weeks. Note that the Russian stock market is down over 30% with Russian banks leading the way lower. European banks are down sharply and financial sanctions against Russia could affect global finance.
The Composite Breadth Model is bearish and there could be a flight to safety (bonds rise and rates fall). This could also put downward pressure on XLF and KRE. The first chart shows XLF failing to exceed its January high and falling 6.5% the last two weeks. The long-term trend is up and XLF is still above support, but the bearish winds are weighing and XLF is likely to break support.
The next chart shows KRE forming a lower high from January to February and declining 5.3% the last two weeks. As with XLF, the long-term trend is up, but the bearish Market Regime and flight to safety are negative.
XLP and PBJ Stall Out
The Consumer Staples SPDR (XLP) and Food & Beverage ETF (PBJ) are defensive groups and they are in uptrends, but they are also stalling out here in 2022. Even though both are holding up much better than the broader market, they are still down around 2.5% year-to-date. As with XLF and KRE above, they formed lower highs from January to February. Defensive groups are still part of the stock market and the bearish Market Regime will weigh, though they may hold up better and go down less.
XLV and IHF are not Immune
The Healthcare SPDR (XLV) and the Healthcare Providers ETF (IHF) are also not immune to a bearish Market Regime as both fell over 5% the last two weeks. The Trend Composite has been bearish for XLV since January 24th and the indicator flipped back to negative for IHF. Both broke short-term resistance in early February, but these bounces failed after retracing 67% of the prior decline.
XLB and IFRA Break Flag/Wedge Support
The breakdown parade continues as the Materials SPDR (XLB) and the Infrastructure ETF (IFRA) broke short-term support. Both fell with the broader market in January, bounced into February with rising flag/wedge patterns and broke short-term support the last few days. Rising flags and wedges are short-term bearish continuation patterns. The recent breaks signal a continuation of the January declines and I would expect a break below the September-October lows. This implies a bigger trend change. Note that XLI is leading the way as it already broke its Sep-Oct lows on Tuesday.
CIBR, SOXX and IGN Break Wedge Support
Even though cybersecurity is as important as ever and demand for semiconductors remains strong, these are tech ETFs and they are not immune to broad market conditions (such as the breakdowns in XLK and QQQ). CIBR broke down in mid January and the Trend Composite turned negative. The ETF retraced 2/3 of the January decline with a bounce into February and reversed this bounce with a breakdown the last four days. Again, this is a bearish flag/wedge and the breakdown signals a continuation of the bigger downtrend.
EV ETFs Break Flag/Wedge Supports
The Autonomous EV ETF (DRIV), Self-Driving EV Tech ETF (IDRV) and Global Auto ETF (CARZ) reversed their uptrends in January, bounced into February and broke short-term supports. These patterns are also quite similar to what we are seeing above: big breakdown in January, short-term bounce in February and short-term breakdown.
ITB and XHB Breaks Summer-Fall Lows
The Home Construction ETF (ITB) seems like a domestically oriented industry group because they build homes on US soil. This is indeed the case, but lumber prices are global and many supplies are sourced outside the US. ITB is also part of the EW Consumer Discretionary ETF (RCD) and this sector ETF broke the summer lows in January and broke the January lows this week. Also note that the Retail SPDR (XRT) is trading at a 52-week low. These breakdowns started before today’s invasion of Ukraine and there are other factors at work in the stock market.
The next chart shows ITB falling around 20% from the December high to the January low, consolidating with a triangle and breaking triangle support last week. The ETF continued sharply lower the last five days and is well below the summer lows. Housing is a key part of the consumer discretionary sector and the economy, and this break down bodes ill for both.
Tech ETF with 52-week Lows
XLC, CLOU, SKYY, FINX, FDN, IPAY, IGV, ARKK, IBB
You can learn more about my chart strategy in this article covering the different timeframes, chart settings, StochClose, RSI and StochRSI.
