Food & Beverage ETF Leaves Us Famished

Here's a daily chart of the Food and Beverage ETF (PBJ) as it runs into resistance near 35 for the third time. This range has been intact for almost four years now and this recent rejection and bearish momentum divergence suggests there's still some overhead supply to work through at this level. While not inherently bearish, it's not a chart we want to be going out and buying...not until prices break through that 35 level.

Click on chart to enlarge view.

This is a great example of something that looks great at the index level, but poor at the individual component level. I may write a longer educational piece on this topic because it happens all the time, however, for now, I think there are two clear categories of stocks within this ETF.

The first category is of stocks that are trending well but are extended to the upside and do not offer an attractive reward/risk at current levels.

Stocks like Starbucks and Hershey, which are the two largest holdings in PBJ, foot this bill. The time to be buying these stocks was when they broke out of their respective bases or at several points along the way, not now when their trends have gone somewhat parabolic and suggest some corrective action is likely.

Here's Hershey grinding higher as momentum diverges.

The other category, which I'd call the "hot messes", includes stocks like Kroger that are either trendless or trending lower. Although most of the stocks in this category have a smaller weighting in the ETF, the problem is they are still part of it and do not look good. If the leaders like Starbucks and Hershey begin to correct through either price or time, there aren't many stocks that look ready to pick up the slack and lead the index higher.

While I was hoping to find some interesting opportunities in this space, right now the best course of action appears to be patience. We'll keep PBJ on our radar with the expectation of an eventual breakout after some more churning to work through this overhead supply at 35.

The real takeaway here is that it's important to know what's driving the index/ETF you're analyzing because while its chart may look tasty, not knowing the ingredients that it's made of could be a recipe for disaster.

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Allstarcharts Team