To The Moon

ETF Edge #13

Originally posted on thepensivenugget.com

Markets continue to rally, with war headlines still driving short term price action.

Some ETFs are approaching key technical levels — pay attention to breakouts in the coming days which may signal more upside (at least in the short term).

If you would prefer to read this article in a slideshow format, you can do so at: https://bit.ly/ETF_Edge_13

The Rally Continues

• Most ETFs are continuing last week’s rally, with some close to, or at key levels:
• SPY, QQQ, XLY are very close to testing major resistance
• But, IWM is still underperforming and looks to be stuck trading sideways for now
• XLU has broken out to the upside and is making new all time highs
• XLI and XLP are starting to look more bullish 

• Fixed Income ETFs remain very weak:
• Corporate bonds, LQD and HYG, still face the possibility of a fall to test 2020’s COVID lows 
• EM sovereign bonds (EMB) are consolidating in the midst of a large selloff
• TLT is selling off again as UST yields rise

• Energy stocks (XLE) remain high but have so far failed to decisively break above their quadruple top

• Wildcards:
• Caution is warranted as long as small caps continue to underperform. In a bull market, they should be leading,not lagging rallies
• The US yield curve has gotten even flatter even as the Fed amps up its hawkish rhetoric

Trading Ideas - Performance

Trading Ideas - Commentary

• Volatility in the markets has led us to exit/stopped us out of some positions:
• IWM stopped out for a gain of 1.43%
• XLY stopped out for a gain of 9.26%
• XLI stopped out for a loss of -3.45%
• XLF stopped out for a loss of -6.27%
• XLP stopped out for a loss of -3.14%
• 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 at the end of Feb
• Exited XLE for a gain of 16.64% after oil’s sharp move higher and immediate reversal on 8 March

• Letting winners run:
• Remained short LQD, HYG, and EMB to maintain exposure to the “rising rates” narrative
• Cost push inflation is still high, and will likely be driven higher by the Russian invasion of Ukraine
• Also, fixed income charts are very bearish, especially EMB
• Volatility, uncertainty and general bearishness due to the invasion are weighing heavily on EM debt

Trading Ideas - Short

• LQD, HYG, EMB:
• LQD and HYG look poised for a large move lower, possibly all the way to COVID 2020’s lows
• EMB is now in the midst of the large drop it has been threatening since mid Jan 

• IWM has begun to trade sideways but is underperforming the SPY and QQQ:
• If US equities turn down again small caps will probably lead the way lower
• Wait for the market to signal which direction it wants to move in as IWM is currently trading in a range between $191-$208.5

• 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 to halt the selloff in Chinese stocks

US major indices approach major resistance… SPY

• The SPY has continued to rally and is very close to testing major resistance at $457
• A break above could see a move to test all time highs at $479
• Short term range trading between $410-$457 is also a possible outcome

US major indices approach major resistance… QQQ

• US tech stocks are also approaching major resistance at $367
• A break above could see it rally >$400
• If not, QQQ could spend some time consolidating between $340-$367

But small caps are still underperforming… IWM

• US small caps continue to lag the rally in SPY & QQQ, remaining range bound between $191-$208.5
• In a bull market, small caps should be leading,not lagging rallies   

Financials are still trying to stage a comeback… XLF

• XLF has yet to decisively break back into its bullish channel ~$39
• While it has rallied, it still needs to break above its current downtrend ~$40 to be considered bullish again

Energy stocks remain below their quadruple top… XLE

• XLE managed to rally back to test its quadruple top ~$78.5, although it quickly turned back down again
• It’s reversal on 8 March could have marked the end of its bullish run

Industrials are looking slightly more bullish… XLI

• XLI has broken above resistance ~$102.7, with the level providing support over the last two days
• A rally to retest its highs ~$107.6 is possible at this point
• If it falls back <$102.7, sideways trading between $97.8-$102.7 is likely

Utilities have surged higher to make new record highs… XLU

• XLU has decoupled from oil prices and broken out of resistance at $72 to make new all time highs
• Normally, utilities don’t do well in rising rate environments, but Russia’s war has upended energy/power markets

Consumer staples continue to push higher… XLP

• XLP managed to break above its downtrend ~$75, and is starting to look more bullish
• A rally to test resistance at $76.9 is now quite possible

Consumer discretionary is still mirroring QQQ… XLY

• XLY is still moving in a similar fashion to QQQ and is looking to test major resistance at $189.5, after forming a double bottom ~$161.3
• A break above could see a rally to test $212.5

Real estate stocks remain range bound… XLRE

• XLRE has also rallied, but is still trading in its range between $44.4-$48.8
• Real estate stocks have not been subjected to the same amount of volatility as other markets after its initial war induced selloff

The rally in European equities has stalled… EZU

• EZU has stopped moving higher, and is now consolidating
• It remains a fair distance away from resistance ~$45.7
• European stocks look weak relative to US equities and a further sharp selloff is still possible

EM stocks are in the same boat… EEM 

• EEM is also consolidating after bouncing last week
• It remains within its bearish channel for now (after breaking below in early March), but still looks very bearish
• A fall back to retest its lows ~$40.7 is possible

Will the Chinese government’s intervention keep FXI up? 

• FXI’s post government intervention rally has stalled at the top of its bearish channel, with Chinese large caps failing to break above resistance at $33.8-$35.6
• Further selloffs are still possible

Investment grade corporate debt consolidates… LQD

• LQD is consolidating below resistance at ~$120.7
• A fall to test major support at $105 (2020’s COVID low) is still on the cards especially if UST yields keep pushing higher

As High yield corporates start to fall again… HYG

• HYG failed to rally to resistance ~$83.33 and has begun selling off again
• Major support below that lies ~$78.35 and $67.5 (2020’s COVID low)
• Like LQD, further falls are possible if UST yields keep rallying

EM sovereign bonds continue to consolidate… EMB

• EMB is still consolidating between $93.8 - $97.5
• A further selloff to test 2020’s COVID low ~$85 is still possible with UST yields rallying

As USTs continue to selloff… TLT

• TLT continues to selloff (higher yields) and has fallen below $130, with US 10y and 30y yields now > 2.5%

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