To The Moon

ETF Edge #17

Originally posted on: thepensivenugget.com

Markets are crashing all over the world, with levels of risk and volatility rising sharply.

Times like these, while scary, provide rich opportunities for those who are well prepared.

Markets Finally Breakout… Look Out Below!

• 2 weeks of carnage in global markets have pushed major markets to break below key support levels
• SPY, QQQ, and IWM are looking very bearish
• XLRE turned from bullish to bearish in a little over 2 weeks
• IWM’s underperformance vs the major US indices, and XLP’s outperformance vs XLY, has proved to be prescient in signaling the lack of conviction in the broader Mid-March to April rally

• Energy stocks (XLE) are still elevated, but with macro conditions deteriorating all over the world, how long can demand for oil remain at current levels?

• Fixed Income ETFs have returned to selling off 
• LQD and EMB look intent on testing their COVID lows
• HYG still has a ways to fall, and key support to break through, before testing its COVID lows
• TLT is testing critical support, as US long yields continue to move higher in 2022

Trading Ideas - Performance

Trading Ideas - Commentary

• 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:
• 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 (end of Feb)
• Exited XLE for a gain of 16.64% after oil’s sharp move higher and immediate reversal on 8 March
• Exited LQD for a gain of 5.56%, HYG for a gain of 4.16%, and EMB for a gain of 6.29%

Trading Ideas

• Long:
• XLP again provides us with an interesting bet
• Defensiveness against selloffs in major indices and general market volatility
• Upside potential from its bullish trend
• As before, can pair an XLP long with a short in XLY, especially now that IWM has broken out to the downside, confirming broad market bearishness (be mindful of the beta mismatch and the ways in which it can work for and against you)

• 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 can’t stop falling… SPY

• SPY has broken decisively below key support at $410 after failing to close below the level last week
• It is now trading back inside its bearish channel and further falls are likely, at least until support at $384 and $372

US major indices can’t stop falling… QQQ

• US tech stocks have fallen to the bottom end of their bearish channel after 3 days of brutal selling, and are now trading just below support at $300
•  Closest support below current levels lies at $267

US small caps as well… IWM

• US small caps continue to press lower after breaking below their $191-$208.5 range at the end of April, with no strong support in sight until $151.5

Financials look very weak… XLF

• XLF is hugging the bottom end of its bearish channel and looks more likely to break below than bounce, although it is approaching a cluster of support levels between $32.2 — $33

Energy stocks remain elevated… XLE

• XLE remains elevated, albeit with higher levels of volatility than before
• It looks to be starting the process of realigning with WTI prices, which are a fair bit off their highs for the year
• Support lies at $68.8

Industrials look poised to break below key support… XLI

• Industrials closed below key support at $94 yesterday
• Follow through is needed to confirm the downside breakout by pushing to test support at $84.7

Utilities consolidate after falling from record highs… XLU

• XLU is consolidating between $71 — $72.5 after falling from all time highs at $77
• It remains in its bullish channel, although a test of support ~$70 looks likely in the near future

Consumer staples as well… XLP

• XLP is trading in a similar fashion to XLU, and is consolidating just below $76.9 support after falling from record highs
• XLP remains in its bullish channel, with key support at $74

As Consumer discretionary crashes… XLY

• XLY is currently testing major support at $149.5 after breaking below $161.3 at the end of last week
• Further support lies in the $139.3 — $142.3 region

Real estate stocks have reversed very swiftly… XLRE

• XLRE has broken below the bottom end of its range and its uptrend at $44.4, with a test of major support at $41.1 now likely
• Real estate stocks have gone from looking bullish to bearish in just over 2 weeks!

European equities look to test their 2022 lows… EZU

• EZU continues to tumble, and is approaching its March ’22 lows ~$37, with support after that coming at $35.6

EM stocks turn even more bearish … EEM

• EEM, already bearish, looks even weaker now having broken below its Mar ’22 lows at $40.8
• A test of support ~$39 looks very likely, with a downside break opening the door to a fall to ~$32

But Chinese large caps remain resilient for now… FXI

• FXI has held up well given the carnage in markets around the globe, and remains above its March ’22 (pre Chinese govt verbal intervention) lows at $26.2, although a test of this level is possible in the near future

Investment grade corporate debt continues to sell off… LQD

• LQD’s selloff has continued, and looks increasingly likely to test major support at $105 (2020’s COVID low)

High yield corporate debt as well… HYG

• HYG has made a decisive move below critical support ~$78.35
• A move down to test support at $73.3 is likely, a break of which could see a retest of COVID lows at $67.5

EM sovereign bonds look to test their COVID lows… EMB

• EMB has fallen sharply after breaking below $93.8 support, and is moving swiftly towards its 2020 COVID low ~$85

As USTs test critical support… TLT

• TLT is currently testing critical support ~$111 as volatility in rates remains high, with 10y yields hitting a high of 3.2% yesterday before reversing back to 3%

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