ETF Edge #19
Originally posted on: thepensivenugget.com
ETF performance is starting to diverge. Can this last, or are markets just taking a breather after their panicked selloff?
Whatever it turns out to be, keep an eye on what the weakest markets are doing.
ETFs Are Starting To Diverge, Sell The Weakest
- Markets are starting to move in a differentiated manner again, but will this last?
- QQQ is still looking very bearish, even as SPY and IWM take a breather
- XLI and XLF still look weak
- XLP and XLY are now both very bearish, as inflation begins to bite into retailers’ margins
- Energy stocks (XLE) are still making new highs for the year, but with macro conditions deteriorating all over the world, how long can demand for oil remain at current levels?
- Fixed Income ETFs still look very bearish
- LQD and EMB look intent on testing their COVID lows
- HYG is likely to break below key support and test its COVID lows
- TLT is testing critical support, amidst high volatility in US rates
Trading Ideas - Performance
Trading Ideas - Commentary
- Entered a straddle on XLU at a strike of $72, expiry Sep ‘22
- Position will be profitable if XLU breaks out of its current 3 week old range
- XLP’s trend turned bearish very quickly last week, and it is no longer a good hedge against a short XLY position
- An outright short against XLP and/or XLY would likely be more profitable
- Looking to enter short positions in IWM, EMB, and possibly EEM on pullbacks
- Re-established shorts in LQD and HYG on breakouts of their previous lows
- Volatility in the markets has led us to exit/stopped us out of:
- Stopped out - IWM 1.43%, XLY 9.26%
- Stopped out - XLI -3.45%, XLF -6.27%, XLP -3.14%
- Exited - LQD 5.56%, HYG 4.16%, EMB 6.29%
- Exited TLT for a gain of 1.72%, as the market focused on the “safe haven” bids narrative at the start of the Russian invasion (end of Feb)
- Exited XLE for a gain of 16.64% after oil’s sharp move higher and immediate reversal on 8 March
Trading Ideas
- Long:
- A straddle on XLU is an increasingly interesting prospect
- Consolidating between critical support and all time highs, which way will it break?
- Straddles are expensive, but will allow us to profit as long as the market makes a decisive break
- With global macro conditions deteriorating, and energy prices remaining sky high, XLU will have to move in one direction or the other
- Short:
- IWM has broken out to the downside and is a fair distance away from the next major support level at $151.5
- LQD, HYG, EMB
- LQD, HYG, and EMB again look poised for a large move lower, possibly all the way to COVID 2020’s lows
- EEM recently broke below its well established bearish channel, and is looking very weak even with its bounce
- EZU and FXI are also good short candidates, as their charts still look bearish
- FXI is trickier to trade now as the Chinese government has verbally intervened once to halt the selloff in Chinese stocks
US major indices begin to diverge a little… SPY
- SPY briefly dipped below the $384 level, but again managed to find some support in the region
- It is now testing the top of its bearish channel, with major resistance at $410 and $416
US major indices begin to diverge a little… QQQ
- QQQ is still very weak
- US tech stocks broke below their bearish channel again, and made a new low for 2022 before catching bids at the $280 support level
- Resistance lies at $300 & $316
As US small caps stay stuck in the middle… IWM
- US small caps remain a fair distance away from both key resistance at $191, and major support at $151.5
- The trend remains firmly downward, and IWM is still entrenched in its bearish channel
Financials bounce at major support… XLF
- XLF fell to test support at $32.2, where it bounced strongly, rallying back into its channel
- Resistance lies at $35, and a break below $32.2 would signal a move to ~$29
Energy stocks keep making new highs… XLE
- XLE continues to rally, and is still making new highs for the year
- Oil prices remain a fair bit off their highs for the year, with volatility still high
- Support lies at $68.8
Industrials look bearish… XLI
- Industrials broke below their bearish channel, but managed to catch some bids and bounced back
- A test of major support at $84.7 is still possible, with resistance now at $94
And Utilities test the top of their short term range… XLU
- XLU is testing the top of its 3 week range at $72.5
- A decisive break of this level could see a retest of its all time highs at $77
- The trend is still bullish, with key support ~$63, and key resistance ~$77
Consumer staples plummet as inflation bites… XLP
- XLP failed to follow through on last week’s break above $76.9, and has now plummeted out of its bullish channel
- Major support lies at $70
- Inflation has begun to bite into US retailers’ margins
As Consumer discretionary keeps falling… XLY
- XLY continues to trade lower, and has fallen to test major support at $139.3
- A break below could see it drop to the $129 region
- The trend is very bearish, with new lows looking likely
Real estate stocks start to consolidate… XLRE
- XLRE has begun to trade sideways between $41.5 — $43.3
- Key resistance lies at $44.4, with support just below its range at $41.05
European equities catch some bids… EZU
- EZU has managed to rally higher after finding support at $37.8 two weeks ago, and could be in the process of forming a wide range
- A test of support at $35.6 is still possible given how bearish the trend is
EM stocks manage to bounce … EEM
- EEM has rallied above resistance at $40.8, but remains below its bearish channel
- Support lies at $39, a break of which will open the door to a fall to ~$32
With Chinese large caps in between key levels … FXI
- FXI continued to rally after bouncing 2 weeks ago, and is now trading between key resistance at $33.8, and major support at $26.2
- The trend remains very bearish, and a move to $26.2 looks likely
Investment grade corporate debt trades sideways… LQD
- LQD has started to consolidate between $110.8 — $112.5, with its broader trend still very weak
- A test of major support at $105 (2020’s COVID low) remains likely
High yield corporate debt makes a small bounce… HYG
- HYG is still trading below $78.35, but caught some bids over the last week
- A move down to test support at $73.3 is still likely, a break of which could see a retest of COVID lows at $67.5
EM sovereign bonds too… EMB
- EMB also caught some bids, and could be starting to form a range between $88.5 — $89.8
- It remains in a very bearish trend, and remains on course to test its 2020 COVID low ~$85
As USTs hover near critical support… TLT
- TLT continues to trade between critical support ~$111 and resistance at $118.6
- 10y yields are now trading ~2.85%, and could be in the process of topping out (TLT bottoming)
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