To The Moon

ETF Edge #24

Originally posted on: thepensivenugget.com

Markets are trading in a start-stop manner, which is frustrating for bulls and bears alike.

Sharp falls followed by large rallies may continue for a while as many developed markets head into summer, but stay mindful of how bearish trends are.

Start-Stop Markets Frustrate Bulls & Bears. Trend Still Bearish!

• Most ETFs moved off their lows over the course of last week, taking some of the sting out of early June’s sharp falls, but
• Trends remain very bearish, and correlation between markets is high, both of which indicate that further weakness is possible
• More start-stop price action, or consolidation, is possible as most developed markets head into summer 
• XLF is telling us something interesting - financials are “supposed” to do well in rising rate environments, like now, but they aren’t. The economy clearly isn’t doing well, at least from the market’s perspective

• Energy stocks (XLE) finally catch some bids after their brutal sell off, and might have made their cycle highs. Oil prices are still ~$110, but this is still too high with macro conditions deteriorating all over the world

• Fixed Income ETFs continue to eye a test of their COVID lows
• LQD and HYG remain slightly above their COVID lows, while EMB has already broken briefly below its own
• TLT is hovering around the critical 111 level as US long yields come down off their highs

Trading Ideas - Performance

Trading Ideas - Commentary

• Went short IWM again as it broke below support at 181.5
• 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 as it broke below short term support at 90
• Trade aims to capitalize on EMB’s bearish trend, as well as deteriorating global macro conditions

• 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
• Volatility in XLU has increased dramatically, with sharp falls and rallies. However, the net effect of both has been little underlying price movement, which is not good for our straddle’s profitability

• Shorts in LQD and HYG stopped out as both spiked higher over the end of May, for respective returns of 4.93% and 3.33% 

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 remains vulnerable to further sell offs given how harsh deteriorating macro conditions are on small cap equities
• It is trading a fair distance away from the next major support level at 151.5. Its short and medium term trends have now realigned 

• LQD, HYG, EMB
• LQD, HYG, and EMB can still make a large move lower, with a test of COVID 2020’s lows now a real possibility

• EEM recently broke below its well established bearish channel, and is looking very weak
• 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

Broad US equities come off their lows… SPY

• SPY rebounded strongly over the last week after breaking below support at 372
• It has also rallied above 384, but still remains a distance away from major resistance at 416
• Support lies at 372 and 362

Tech stocks as well… QQQ

• QQQ also moved higher last week, and pushed above the 280 level
• It is approaching resistance at 300, a break of which could see a test of major resistance at 316
• Support remains in the 260–267 region

US small caps too… IWM

• IWM rallied above resistance (previous major support) at 169, and 172
• Next major resistance stands at 191
• With the trend still very bearish, a move down to 151.5 remains likely

Financials move with the broader market… XLF

• XLF carved out support at 30.6 and rallied back to resistance in the 32.2–33 region
• If it breaks above 33, a rally back to resistance at 35.5–36.4 is possible
• If not, expect a retest of 30.6 and possibly 28.1

Energy stocks might have made their cycle highs… XLE

• XLE sold off to just above support at 68.8 before catching some bids
• A break below could see further falls to 65 or even 62; with resistance at 78.5
• Oil prices have rallied back to ~110 after almost falling to 100

Utilities rally as furiously as they tanked… XLU

• XLU caught bids at major support in the 63–64 region, and spent the week rallying furiously
• It is close to testing major resistance at 70

Industrials bounce off major support… XLI

• Industrials’ sell off was halted by bids coming in at major support ~84.7
• XLI is trading ~89, and remains far closer to a retest of 84.7 than major resistance at 94
• A break below 84.7 could bring about a fall to 74.7

Consumer staples as well… XLP

• XLP also attracted bids at major support ~68, and easily rallied above resistance at 70
• It could make a move to test resistance ~74
• Given the bearish trend, a retest and break below 68 is still a distinct possibility

As Consumer discretionary approaches resistance… XLY

• XLY found buyers ~133 and rallied strongly back into the 140s
• A test of resistance at 149.5 is possible, but it is too early to discount a test of major support at 122.6

Real estate stocks rally out of their consolidation… XLRE

• XLRE moved higher after consolidating above major support at 38.25 to test resistance ~41–42
• Major resistance lies at 44.4, with support at 38.25 and in the 33–34 region

European equities consolidate above major support… EZU

• EZU is consolidating above major support at 35.6, with major resistance close by at 37.8
• It has yet to really test either level, but a decisive break below could see a sell off to test its COVID 2020 low at 30

EM stocks too… EEM

• EEM is also consolidating between major support and resistance, between 39–40.8
• A break below could open the door to a fall to ~32

As Chinese Large Caps test major resistance again… FXI

• FXI has made a push to test major resistance ~33.8, and managed to break above it
• If the breakout holds, a test of 35.6 and possibly 39.1 is on the cards
• Major support lies at 26.2

Investment grade corporate debt fails at resistance… LQD

• LQD managed to rally to 110, but failed to break above, and has fallen slightly lower
• It remains caught between resistance at 110 and 2020’s COVID low at 105
•  A test of 105 remains a very real possibility

High yield corporate debt fails to break major support… HYG

• HYG failed to break below major support ~73.3, and has rallied higher, but remains below resistance at 76
• A break below 73.3 will open up a move lower to test 2020’s COVID low at 67.5

EM sovereign bonds hover around their COVID lows… EMB

• EMB managed to briefly rally off its COVID lows at 85, but has since fallen back to test it again
• Major support below that lies ~77, which dates back to 2009

As USTs bounce back to resistance… TLT

• TLT is back hovering around the ~111 region, as 30y yields spent another week trading below 3.4%
• Closest major support lies a distance away ~102

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