To The Moon

ETF Edge #16

Originally posted on thepensivenugget.com

Note: We will be taking a short break. Regular posting of ETF Edge will resume in May. Thank you for reading!

The long weekend in most markets left many of them trading sideways, with some still hovering around major support levels.

Watch for breakouts of these levels, and the opportunities that they present.

Watching For Breakouts Instead Of Easter Bunnies

• Easter holidays in a number of major markets made for a shortened trading week, and lots of sideways trading. Will we see some breakouts this week?
• SPY, QQQ, XLY are consolidating after their selloffs, but have not yet moved to retest their post invasion lows
• IWM’s underperformance looks to have been prescient (at this point) in signaling the lack of conviction in the broader Mid-March to April rally, and remains stuck in its range
• XLU and XLP are looking bullish; XLI, XLF are starting to look bearish

• Fixed Income ETFs were split between consolidation and selling off
• In corporate bonds, LQD sold off while HYG traded sideways, though both are still likely to test 2020’s COVID lows 
• EMB is still hovering above major support, a break of which could also see it fall to its COVID lows
• TLT continues to make new lows for the year, as US long yields trade at or near their highs for 2022

• Energy stocks (XLE) finally broke above their quadruple top, and look primed for more gains. Curiously, WTI isn’t trading near its highs for the year

• Wildcards:
• Consumer staples stocks (XLP) have reverted to outperforming their consumer discretionary counterparts (XLY), which hints at serious economic problems compounded by high inflation 
• The US yield curve remains flat and inverted in some places even as the Fed amps up its hawkish rhetoric

Trading Ideas - Performance

Trading Ideas - Commentary

• Re-established shorts in LQD and HYG on breakouts of their previous lows
• Looking to do the same with EMB

• 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:
• XLE is an interesting trade now for a few reasons
• It is trading at new highs for the year
• Looks to be a more effective way of capitalizing on the bullish trend in energy prices vs going outright long on oil
• WTI isn’t close to its early March peak (for now)
• WTI is also trading with a lot more volatility

• XLU provides a nice, strong bullish trend to follow that is also a play on the shortage and uncertainty surrounding global energy markets  
• Oil prices remain volatile and difficult to trade without getting stopped out

• 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 if IWM breaks out to the downside (be mindful of the beta mismatch and the ways in which it can work for and against you)

• Short:
• IWM is still trading sideways, with a downside break looking more and more possible
• Wait for the market to signal which direction it wants to move in as IWM has yet to make a decisive breakout of its range between $191-$208.5

• 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   

• XLI and XLF are starting to look weak, although further downside breakouts are needed for confirmation

US major indices tread water… SPY

• SPY spent the week trading sideways, with no real impetus towards key support at $410 or key resistance at $457
• These remain levels to watch for breakouts to the downside/upside

US major indices tread water… QQQ

• US tech stocks also spent the week going sideways, consolidating around support ~$340
• A break below here can open the door to a retest of QQQ’s Russian invasion low ~$316

US small caps as well… IWM

• US small caps, already range bound, naturally followed along with the SPY & QQQ
• IWM remains in its $191-$208.5 range, and needs a decisive break below $191 to confirm the continuation of its downtrend

Financials are still hovering near support… XLF

• XLF continues to trade around support at $37.2 without breaking out decisively
• Financials remain in their bearish channel however, and need a strong move above $40 to have a chance at testing $41.6 again

Energy stocks move above their quadruple top… XLE

• XLE has finally moved above its quadruple top ~$78.5, making a new high for 2022
• Curiously, while WTI rallied strongly over the week, oil prices remain a fair bit off their highs for the year

Industrials are still bouncing around in their wide range… XLI

• Industrials continue to trade between $97.8 support and $102.7 resistance
• Watch for breakouts from these levels
• XLI’s sharp reversal below $102.7 at the end of March did indeed signal the end of its bounce, at least for now

Utilities ease off all time highs, but only slightly… XLU

• XLU has taken a slight breather from its recent breathtaking move higher, but is still trading at the top end of its bullish channel
• Resistance is now at its all time high just above $77, with major support a fair bit away at $72

Consumer staples keep making new highs for 2022… XLP

• XLP continued to move higher over the week, and is looking very bullish above $79
• Consumer staples stocks have reverted to outperforming consumer discretionary ones again

As Consumer discretionary hovers at support… XLY

• XLY is hovering around support at $178.5, after briefly breaking below at the start of last week
• A selloff to test key support at $161.3 is still possible, but so is a rally to retest $189.5 resistance

Real estate stocks consolidate above support… XLRE

• XLRE still hasn’t taken off after breaking out of its range last week, but it still hasn’t fallen back down either
• It continues to consolidate above previous resistance at $48.8
• A retest of highs at $52 is still possible

European equities are also in on the sideways action… EZU

• EZU also traded sideways over the past week
• They look far weaker than their US counterparts though, and a further selloff to March lows ~$37, if not support at $35.6, is looking likely

EM stocks too… EEM

• EEM treaded water along with US and European stocks over the past week
• Its mid March rally looks to be over, and a fall back to retest its lows ~$40.7 is possible, unless it musters up a rally above $46.7

And Chinese large caps… FXI

• More sideways action, this time in FXI
• Its break above $33.8 has turned out to be very brief, having almost fallen back into its bearish channel
• Will the Chinese government verbally intervene again?

Investment grade corporate debt continues to sell off… LQD

• LQD’s selloff has continued, with a sharp move lower at the end of the week
• A fall to test major support at $105 (2020’s COVID low) is looking more and more likely

Even as High yield corporates hold on to support… HYG

• HYG is hovering around support ~$80.5 after briefly breaking below at the beginning of last week
• Critical support lies ~$78.35, a break of which would open up the possibility of retest of its COVID lows at $67.5

EM sovereign bonds are also holding on… EMB

• EMB continues to hover around major support at $93.8
• A decisive break below will reopen the door to a test of 2020’s COVID low ~$85
• Resistance lies above ~$98.3

And USTs continue to plummet… TLT

• TLT continues its relentless march lower, as US 10y yields moved back above 2.8%
• A test of major support ~$118 looks likely, a break of which would put support ~$111 into play

Thank you for taking the time to read our work. If you enjoyed it, please visit us at: thepensivenugget.com