We have an interesting mix of overbought ETFs and ETFs that are consolidating. ETFs that are overbought are not outright bearish, but they do not have tradable setups. The overbought ETFs are the current leaders because they are the ones with the biggest gains and the ones trading at 52-week highs. ETFs that are consolidating within uptrends have tradable setups, such as bullish flags, pennants and triangles. They are not as strong as the leaders because they stalled as the leaders moved to new highs. Nevertheless, they are in uptrends and have bullish charts.
Holiday Scheduling
I published two reports today (December 30th): The Market Timing Report and this ETF report. The normal commentary schedule will resume next week.
Happy New Year!
Recent Trend and Mean Reversion Signals
Note that a beta version of the ETF ranking table is now available. This table can be sorted, searched, exported and printed. There are even chart links! Click here to check it out.
There were no new StochClose signals over the past week. The Silver Miners ETF (SIL) triggered the most recent signal six days ago and consolidated above the breakout zone. Elsewhere, several energy related ETFs triggered bullish signals three to five weeks ago and then pulled back the last few weeks.
Note that StochClose signals are part of a trend-following strategy that is detailed in a six part series that can be found mid way down the Premium Page. The Core Chartlist with 117 ETFs is used for this table and this can also be found on the Premium Page.
The chart below shows SIL correcting back to the rising 200-day and breaking out of a falling wedge. This breakout is considered valid as long as the rising 200-day holds. Note that the Silver ETF (SLV) broke out as well and the Gold SPDR (GLD) is challenging resistance. The latter two are featured further down.
The next table shows ETFs with uptrends and oversold signals. This means the active signal for StochClose is bullish and RSI is in the 30-50 zone, which denotes an oversold condition. There are three energy-related ETFs (XLE, AMLP, FCG), two Chinese ETFs (FXI, KWEB) and two bond proxies (XLU, XLRE).
The chart below shows the China Large-Cap ETF (FXI) with a new high in early November and pullback that retraced around 50% of the prior advance (Sept-Nov). The long-term trend is up because FXI hit a new high recently and is above the rising 200-day. A setup is in play because a 50% retracement is normal for a correction within a bigger uptrend, as is an RSI dip into the 40-50 zone. Also notice that FXI is trading near broken resistance, which becomes support. Signs of a short-term bullish reversal are taking shape as StochRSI popped to its highest level since early November.
The next image shows ETFs with the biggest StochClose gains (absolute change, not percentage). Note that three bond ETFs jumped over this past week (LQD, MUB, AGG). The jumps were not huge, but this does show some money moving towards fixed income assets (as opposed to stocks). The Dollar jumped, but from a very low level. UUP has been with a downtrend signal since June 1st.
The chart below shows the Corporate Bond ETF (LQD) correcting with a falling wedge into late October and breaking out in early November. LQD then fell back with a falling flag in early December and broke out again in mid December. Also notice that RSI dipped below 50 twice in December.
ETF Trends, Patterns and Setups
Not all ETFs in the All Weather List are covered in the groupings below. Some excluded ETFs are very strong and hitting new highs (TAN, PBW, REMX, PHO, XLY), but I do not see a tradable setup or interesting observation. Others are simply off my radar, such as energy-related ETFs.
Extending After Breakout
XLK, IGV, FDN, SKYY, HACK, IPAY, FINX
The tech-related ETFs are leading the market in late 2020 with fresh new highs. The Technology SPDR (XLK), Software ETF (IGV) and Internet ETF (FDN) were a little late to the breakout party and their post-breakout extensions are not as strong as some of the others. Post breakout and post signal ETFs such as these are in the trend-monitoring stage. The setups evolved, the breakouts or signals triggered and they are now in the middle of a move. The advances could certainly extend further, but the odds of a correction or pullback increase with each passing day. It is the correction or pullback that sets up the next tradable setup.
The first chart shows XLK with a breakout in late November and extension to new highs. The breakout zone in the 120 area turns first support to watch on a pullback. The second chart shows IGV with the breakout zone in the 320-330 area turning into first support. Pullbacks to their respective support zones could provide the next tradable setup.
The Cloud Computing ETF (SKYY), Cyber Security ETF (HACK), FinTech ETF (FINX) and Mobile Payments ETF (IPAY) advanced some 30% from the late October low to the late December high. These are strong moves, but I see no reason to chase after RSI exceeded 75 for IPAY, and 80 for FINX, SKYY and HACK. This is the time to think about a profit target or a trailing stop, or make a plan to ride out a corrective period.
New High and Quite Extended
IWM, XRT, XBI
The first time RSI moves above 70 does not really denote an overbought condition because we often see multiple readings above 70 before an ETF becomes truly overbought, and then corrects. The chart below shows the Biotech SPDR (XBI) with the number of days RSI is above 70 in the lower window. RSI was above 70 for 20 days and this streak ended on Tuesday. This indicator has been above 12 just four times in the last ten years. XBI traded flat after becoming extremely overbought in May 2011 and December 2019 (red lines), and dipped back to the 200-day after the overbought reading in July 2014. Three instances is a small sample size, but clearly XBI is ripe for a corrective period after a 20-day stretch when RSI was above 70.
Sometimes RSI dips below 70, but remains in the area as prices move higher. The next chart shows the Retail SPDR (XRT) with RSI first moving above 70 on November 23rd and exceeding 70 on Monday, December 28th. This means RSI has been flirting with the 70 level for over a month, which also denotes an overbought condition. Overbought is not outright bearish. It just means we should prepare for a corrective period, which could involve a pullback or a sideways price range.
The XBI and XRT charts show the ATR Trailing Stop, which can be used as part of an exit strategy. This type of stop ignores “overbought” conditions and simply rises as long as prices rise. It triggers when there is an outsized decline based on ATR and the ATR multiple. You can learn more about ATR Trailing stops in this post, which includes a video and charting option for everyone.
And finally, we have the Russell 2000 ETF (IWM) with RSI above 70 for 16 trading days. This is the most days since October 2017 and the fourth time in four years that the number exceeded eight days. Even though IWM did not reverse its uptrend, the going was more difficult after each occurrence. Chartists looking to partake in the uptrend would have been rewarded with patience.
Wait for your setup and then take the shot. Don’t force it!
New High and Short Consolidation
RSP, SOXX, XLC, XME
There are several ETFs with consolidation patterns forming over the last few weeks. Some consolidations are short (a few weeks) and some are long (up to seven weeks). A consolidation represents a rest and is usually resolved in the direction of the prior move, which is up in this case. Thus, these consolidations are deemed bullish continuation patterns and breakouts would open the door to new highs. In contrast to the ETFs above, which are overbought to varying degrees, these ETFs are not short-term overbought and there are tradable setups. Plan your trade beforehand and trade according to that plan afterwards.
The first chart shows RSP with an Ascending Triangle breakout, a surge to new highs and a consolidation since early December. RSP was up some 20% with this surge and quite extended. The subsequent consolidation alleviates overbought conditions and paves the way for a breakout that would signal a continuation higher. The other charts show the Semiconductor ETF (SOXX) and Metals & Mining SPDR (XME) with short-term bullish continuation patterns.
New High and Long Consolidation
XLV, IHI, IHF, XLI, XLP, ITB
The next six ETFs have longer consolidations than those above. Even though the Healthcare ETFs broke out of small consolidation patterns in mid December, they are still below their early November highs and have traded flat the last several weeks. Nevertheless, all three recorded new highs in November, all three are in uptrends and further gains are expected. In general, expect a continuation of the bigger trend, not a reversal.
The next chart shows the Industrials SPDR (XLI) with a November surge, breakout and new high. After hitting the new high, XLI traded flat the last 20+ days with a very tight consolidation. You do not need Bollinger Bands to know that volatility seriously contracted and to expect a volatility expansion. An upside breakout would end the consolidation and signal a continuation of the bigger uptrend.
And finally, the next chart shows the Home Construction ETF (ITB), which hit a new high in mid October and then consolidated into December. ITB did break out of the triangle and this breakout is holding. The ETF, however, has yet to exceed the November high and is still range bound the last few months. Nevertheless, I view this as a bullish continuation pattern and it looks like the continuation has started. The December lows (green line) and ATR Trailing Stop can be used for an exit strategy.
Silver Holds Breakout as Gold Challenges Resistance
The Silver ETF (SLV) broke out, held its breakout and extended higher. There is clearly a bullish configuration on the chart with the new high in August, correction into early December and breakout over the last few weeks. The retracement amount (50-67%) and pattern are normal for corrections within a bigger uptrend. The breakout ended the correction and a challenge to the summer high is expected as long as 22 holds.
The Gold SPDR (GLD) is up around 5% here in December with a bounce near the rising 200-day SMA. Even though StochClose triggered bearish in late November, the decline since August could still be a correction within a bigger uptrend. GLD recorded a new high in August and the decline retraced around 2/3 of the prior advance. A falling channel formed and GLD is on the verge of a breakout.
Breakout and Consolidation (no new high)
XLF, KIE, REZ, XAR
The four ETFs in this group broke out of consolidation patterns with BIG moves in November and then consolidated the last few weeks. They have yet to record 52-week highs in the fourth quarter of 2020 so they are not as strong as the ETFs that did. Their charts have similar characteristics: multi-month consolidation, November surge, breakout and consolidation. These short-term consolidations are deemed bullish continuation patterns as well. The Aerospace & Defense ETF (XAR) is the strongest of the group because it is the closest to a new high.
