Go Up Together, Go Down Together. ETF Trading Opportunities

ETF Edge #33

Originally posted on thepensivenugget.com

Last week’s Jackson Hole meeting has injected some downside volatility into equity markets, pushing the summer rally into reverse.

Go Up Together, Go Down Together

• The summer rally has begun to reverse, with large sell offs as markets react to Jackson Hole
  - SPY, QQQ, and IWM have now broken below major support levels
  - Continue to pay attention to EEM. If it breaks below its recent range, it could signal further weakness in risk assets
  - Remember that changes occur at the margins first, then spread to the core
• Energy stocks (XLE) are an exception to the current selloff in stocks, and could be headed for a test of its current cycle highs. Oil prices are back in the mid $90s, but this is still too high with macro conditions deteriorating all over the world
  - XLU has come down from its all time high in tandem with the broader market selloff
• Fixed Income ETFs are in a precarious position
  - TLT has fallen back to the bottom of its range. If it rallies again, and manages to break out to the upside decisively, be prepared for more turbulence in markets
  - EMB’s (Emerging Market USD denominated debt) rally has started to reverse, falling sharply to indicate that the global USD shortage is getting worse, and pointing towards a further sell off
  - LQD, HYG, and EMB are not mechanically tied to UST prices. Should a financial or economic crisis arise, UST prices can rise even as other fixed income assets sell off

Trading Ideas — Performance

Trading Ideas — Commentary

• Re-entered short in IWM at 186.95 after it gapped lower on the open
  - High beta small cap stocks are primed to suffer heavy losses given equities’ bearish trend, and deteriorating macro conditions
• Re-entered short position in EMB after it broke below major support ~88
  - Trade aims to capitalize on EMB’s bearish trend, as well as deteriorating global macro conditions
  - EMB can still fall even if prices of USTs keep rising (yields fall), if macro conditions get bad enough
  - It has already broken below its 2020 COVID low, signaling increasing stress in the global USD funding market
• Entered a straddle on XLU at a strike of 72, expiry Sep ‘22
  - Position will be profitable if XLU makes a decisive move in either direction
  - XLU has rallied back to all time highs, and if it continues to push higher from here, will drive our straddle into the green

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
• TLT
  - This trade is covered in our Macro Edge reports

Short

• IWM remains vulnerable to deteriorating macro conditions, especially with how bearish 2022 has been for small cap equities
  - The trade can also be expressed via other high beta ETFs, like QQQ and XLY
• LQD, HYG, EMB
  - LQD, HYG can still make a large move lower, with a test of COVID 2020’s lows a real possibility, especially with EMB having already done so
• XLE looks like an increasingly attractive short
  - Global economic conditions are rapidly deteriorating
  - Oil prices are off their peak even with global supplies tight, and Russia’s war dragging on
  - Patience is needed here for XLE to make a decisive break lower, as it has managed to rally strongly in recent weeks
• EEM and FXI are good short candidates, as their charts are looking weak even as the summer rally progresses
  - Remember that change starts at the margins and spreads to the core (learn more about this in our Global Macro course). In market terms this means that weakness in EM (EEM, EMB, FXI) often presages weakness in DM

Broad US equities tumble… SPY

• SPY has continued to move lower, with the market reacting bearishly to news out of Jackson Hole
• It has broken below support in the 410–416 region, and could soon be headed towards support at 390

Tech stocks are looking increasingly bearish… QQQ

• QQQ has broken below support at 316, and a break below could see it drop back to 300
• A move to test its lows at ~267 remains possible given poor global macro conditions

US small caps break below major support… IWM

• IWM has broken below major support at 191, but the fall does not yet look as decisive as the SPY’s and QQQ’s tumble
• A drop to 178 and even 163 is possible given poor global conditions and the broader equities selloff

Financials’ rally reverses… XLF

• XLF tumbled along with the broader market, after failing to break above major resistance at 35.5 in mid August
• A test of major support in the 32.2–33 region looks to be on the horizon

Energy stocks break above resistance… XLE

• XLE has broken above major resistance at 78.5, and could be headed to test its highs ~93
• WTI has rallied back into the mid 90s, although further falls in XLE cannot be discounted, given deteriorating global macro conditions

Utilities remain close to their all time highs… XLU

• XLU tumbled with the broader equity market, but remains close to its all time highs
• New highs are still possible given the bullish trend
• Short term support lies ~75, with major support at 72 and ~63

Industrials break back into their bearish channel… XLI

• XLI continues to tumble, and is close to testing major support at 94 after falling back into its bearish channel and below 97.8
• A fall back to 84.7 is possible, although another attempt to reach 102.7 can’t be ruled out yet

Consumer Staples is testing major support… XLP

• XLP has fallen from major resistance in the 76.3–76.9 region to test major support at 74 in the space of a week
• A decisive break below 73.5 could see a fall back to test support at 68

Consumer Discretionary breaks below major support… XLY

• XLY fell along with everything else, and has broken below major support ~161.3, although the break does not look decisive yet
• A move to test resistance at 178.5 remains possible, as is a further fall to 149.5
• Be wary of a drop to retest major support ~136

Real estate stocks pull back… XLRE

• XLRE continued to pull back, and could be headed for a test of major support ~41, where the bottom end of its bearish channel and major support meet
• Closest major resistance lies at 44.4

European equities are testing support… EZU

• EZU fell with everything else, and is testing the bottom end of its recent range at 35.6
• It continues to look very weak, and a retest of recent lows ~33 is possible
• Major resistance lies ~40, at the bottom end of its old bearish channel

EM stocks continue to trade within their range… EEM

• EEM remains within its range between 39–40.8
• A fall to ~32 is still likely
• A decisive break into the 42 area is needed to really signal real bullishness in risk assets
• EM weakness is a harbinger of broader global weakness

As Chinese Large Caps muster a rally… FXI

• FXI has rallied but remains in its wide range between 26.2–33.8
• A move lower, possibly to test major support at 26.2 is still possible given the bearish medium term trend, and weakening economic conditions around the world

Investment grade corporates hover around support… LQD

• LQD is still testing support at the bottom of its 110–115 range
• Falling UST yields need not always lead to higher prices in LQD
• In a crisis, LQD can tumble even as UST yields plummet — keep an eye on 105

High yield corporate debt too… HYG

• HYG has moved slightly below support at 76, but not in a decisive manner
• A sharper move down is needed to test support at 73.3, which will open up a move lower to test 2020’s COVID low at 67.5

EM sovereign bonds have reversed their rally… EMB

• EMB’s rally has gone into reverse after hitting 90, and is close to testing support at 85 again
• Major support lies ~82, and ~77
• A turn back down in EMB will not bode well for overall risk sentiment in global markets

And USTs continue to test the bottom of their range… TLT

• TLT has fallen to the bottom of its range, and is testing support at 111.8
• A decisive break below could see a test of June’s low at 108
• The US 30y is trading ~3.2%, and USTs have likely made their cycle highs, which does not bode well for risk assets

Do you want to make money trading a crisis? Check out our course on how to do so. And don’t forget to sign up for our FREE course on how to create a trading plan!

DISCLAIMER:

The information herein is for assistance and informational purposes only. It is not intended to be, and must not be taken alone as a basis for investment and/or trading decisions. Each recipient of this information should engage in their own due diligence process at the consult of their own legal, financial, accounting, regulatory, and tax advisors. You are solely responsible for any trading or investment decisions that you make.

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