To The Moon

ETF Edge #22

Originally posted on thepensivenugget.com

The recent market bounce is clearly over, and the bloodbath across all markets continues.

Naturally, this means that most trading opportunities are biased to the short side.

More Pain Incoming, a.k.a The Bounce Is Over

• The markets are done bouncing and have moved into the second leg of their selloff, which has been brutal, with everything falling together
• High beta, low beta, and the SPY itself have all seen dramatic falls
• 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

• Even Energy stocks (XLE) took a tumble, and are off their highs. Oil prices remain elevated ~$120, but with macro conditions deteriorating all over the world, how long can demand for oil stay as it is?
• XLU has made an aggressive reversal to the downside, and now looks more intent on testing support than makingnew all time highs

• Fixed Income ETFs continue to sell off strongly together, with a test of COVID lows looming
• LQD and HYG move closer to testing their COVID lows, while EMB has already broken briefly below its own
• TLT has fallen below critical support as US 10y yields move above 3.3%

Trading Ideas - Performance

Trading Ideas - Commentary

• Went short IWM again as it broke below support at 181.5, but order was filled at 180.5 due to a gap open
• 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
• Straddle is paying off as XLU has very aggressively reversed its direction
• 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 take a dramatic tumble… SPY

• SPY gave up all its end of May rally gains in just 3 gapped filled sessions, and is now testing key support at 372
• Support is clustered around 360–367, and a decisive break below could see SPY fall to key support at 321

Tech stocks as well… QQQ

• QQQ has broken below support at 280 (late May’s low), and now has the 267 level in sight
• Support lies below in the ~260 region

As US small caps flip flop aggressively… IWM

• IWM has gone from testing major resistance to testing major support in just 4 days
• Should it break below 169, major support lies a distance away at 151.5

Financials fall in a rising rate environment… XLF

• XLF has fallen sharply below support at 32.2–33
• Closest support now lies between 28.1–28.9
• XLF is selling off even as the Fed raises rates, which is opposite to how mainstream narratives claim financials should behave

Even Effervescent Energy loses some of its bubbly… XLE

• XLE has not been immune to the broad selloff in equities, coming sharply off its highs
• Support lies around the 78–80 region
• Oil prices are still hovering close to their Feb highs ~$120

Industrials eye a test of major support… XLI

• Industrials have fallen back down to test support at the bottom of their bearish channel after breaking below support at 94
• Should XLI continue to slide, 84.7 and 74.7 are key levels to watch

Normally steady Utilities abruptly reverse… XLU

• XLU has performed an abrupt 180
• Having broken above 72.5 support in late May, it has gone from eyeing a retest of its all time highs at 77, to looking to test major support between 63–64

Consumer staples fall back to major support… XLP

• XLP has fallen back to major support at 70, giving up most of the gains from its heroic rally
• A break below 70 will see a test of 68, and possibly 63

Consumer discretionary too… XLY

• XLY has also fallen back to test major support, and is trying to catch some bids in the 136–139 region
• Closest major support below that lies at 122.6

Real estate stocks fail at key resistance… XLRE

• XLRE has tumbled from just below key resistance at 44.4, and is now testing major support at 38.25
• Support below that lies between 33–34

European equities fall below their March lows… EZU

• EZU failed to break back into its old bearish channel, and has reversed sharply
• It is now trading below its March lows, and is looking to test key support at 35.6
• A fall to its COVID 2020 low at 30 is possible

EM stocks approach major support… EEM

• EEM also failed to rally back into its previous bearish channel, and has fallen below support ~40.8
• A test of support at 39 looks likely, a break of which could open the door to a fall to ~32

As Chinese Large Caps remain relatively drama free… FXI

• FXI failed to make a decisive break above resistance at 33.8
• It has turned lower along with everything else, but has yet to sell off in a dramatic fashion
• Major support lies at 26.2

Investment grade corporate debt eyes 2020’s low… LQD

• LQD continues to sell off, and has broken decisively below major support at 110
• A test of 2020’s COVID low at 105 is now in sight

High yield corporate debt too… HYG

• HYG has broken below support at 76, and is now testing major support ~73.3
• A break below here will open up a move lower to test 2020’s COVID low at 67.5

EM sovereign bonds have reached their COVID lows… EMB

• EMB did go into reverse after failing to break above its bearish channel, and is now testing its 2020 COVID low ~85
• Major support lies ~77, which dates back to 2009

As USTs move below critical support… TLT

• TLT has dismissed the idea of it possibly forming a bottom by moving below critical support ~111, as 10y yields move above 3.3%
• If the breakout holds, closest major support lies a distance away ~102