Systematic Strategies and Next Level Technical Analysis

ETF Trends, Patterns and Setups – Dollar and Bonds Shine, Gold Dulls, Tech ETFs Hold, SPY Continues Lower, Failed Flags

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And then There were Two

It has been a rough month for everything except the Dollar and Treasury bonds. The chart below shows month-to-date performance for nine ETFs. The Dollar Bullish ETF (UUP) and 20+ Yr Treasury Bond ETF (TLT) are the only gainers this month and both have been positive for the entire month. This is a big difference from August.

QQQ is down the most (10%) in September, while SPY and IWM (small-caps) are down over 7%. GLD and USO are down. The Corporate Bond ETF (LQD) was holding up, but succumbed to selling pressure on Wednesday and is now down for September. The High-Yield Bond ETF (HYG) has been weak all month and moved below its 200-day on Wednesday.

Trading Notes

There are periods when breakouts hold (July) and prices extend after breakouts (July-August). This is when we make money and fatten up for times when breakouts fail, which appears to be now. There were successful breakouts in early July (SPY, ITB, XLY), mid July (IWM, XLI) and even early August (QQQ, XLC). Many of these ETFs moved to new highs in late August and early September.

In contrast to successes, we are now seeing pattern failures as trading turns more erratic. This is the normal ebb and flow of a trading year. A bullish pennant/wedge formed in GLD, but the breakout never took hold and the ETF fell sharply. Falling flags formed in XME and REMX, but these ETFs did not hold their breakouts and fell sharply. The breakouts in XBI and IBB are holding for now, but merit a close watch as market conditions turn uncertain.

During a normal and mild pullback, RSI(14) will dip into the 40-50 zone to become mildly oversold. This happened last week for many ETFs, but another leg lower pushed RSI into the 30-40 zone for many. ETFs where RSI held around 40 are holding up better short-term (ITB, IGV, HACK, TAN, IBB). ETFs where RSI dipped into the 30s are getting hit harder (IWM, MDY, IHF, GLD, GDX, XME). The deeper dips in RSI also show that this correction is deeper as far as downside momentum is concerned.

The charts below are linked to an equivalent StockCharts chart.

ETF Grouping and Ranking by Trends, Patterns and Setups

Leading in September

UUP, TLT

The Dollar represents a flight to safety in currency terms, while US Treasuries represent an alternative to riskier assets (stocks, commodities). The Dollar is up sharply here in September (+2.5%) and TLT is up 1.5%. The Dollar is still in a downtrend overall, but could have further upside, especially if stocks decline further. The Dollar is negatively correlated to the stock market.

TLT is negatively correlated to the stock market for the most part. Thus, further weakness in stocks should keep a bid in TLT. On the price chart, TLT is stuck in a narrowing range and did not break down this week. Note that XLU and XLRE, the bond proxies, did break down. Given my outlook for more correction in SPY, I would expect an upside breakout in TLT.

Consolidating Near Highs

BOTZ, ITB, XHB, TAN

ETFs in this group are consolidating at or near their highs. They hit new highs in early September, fell with the rest of the market for three days and then bounced back towards these highs last week. With another dip this week, they are basically consolidating at high levels. Even though a consolidation within an uptrend is a bullish continuation pattern, broad market weakness could weigh and support breaks would argue for a correction of the March-September advance.

Held Up after Short-Sharp Decline

IGV, SOXX, SKYY, HACK, IPAY

ETFs in this group held up relatively well the last two weeks, but they still have bearish flag patterns working short-term. They recorded new highs in early September, fell sharply for three days and then consolidated. Even though they are above their rising 200-day SMAs and in long-term uptrends, they are still ripe for a deeper correction after massive advances from March to September. Flags after sharp declines are short-term bearish continuation patterns and breakdowns would argue for a deeper correction.

Broke Consolidation Low after Short-Sharp Decline

SPY, QQQ, XLK, XLY, XLC, XLP, XLV, FDN, XRT, IHI

ETFs in this group hit new highs in early September, fell sharply for three days (3-8 September), formed flag-like consolidations and broke down last week. They are still in long-term uptrends, but clearly correcting after massive advances from March to September.

Channel Breakouts Holding

IBB, XBI

IBB and XBI broke out of falling channel patterns with big advances on 14-Sept and then fell back with the rest of the market the last few days. The breakouts are largely holding, but biotechs are not totally immune to broad market selling pressure. Chartists interested in a more granular picture should check out the falling wedges on the 30min charts.

Correcting within bigger Uptrend

GLD, SLV, GDX, LQD, AGG

The precious metals related ETFs peaked in mid August and formed pennant-like consolidations into mid September. There were some attempts to bounce off pennant support and RSI bounced off the 40-50 zone, but there was no follow through and they broke the August lows this week with sharp declines. Blame goes to the rising Dollar. The current decline is still viewed as a correction within a bigger uptrend simply because GLD hit a new high in August and remains well above the rising 200-day SMA. The 170 area is the next level to watch for possible support.

Above 200-day SMA, but Breakaway Gaps and Pullbacks

XLI, XLB

ETFs in this group are above their 200-day SMAs and still in long-term uptrends, but gapped down on Monday and these breakaway gaps are holding.

Failed Breakouts

XME, REMX

ETFs in this group broke out of falling flag patterns last week and gave it all back this week. XME and REMX moved below their August lows with outsized declines and these moves are bearish.

Lagging Long-term and Breaking 200-day (or close)

RSP, MDY, IJR, IWM, IHF, HYG

ETFs in this group did not record new highs, did not hold above their June highs and formed lower highs from August to September. SPY formed a higher high from August to September and ETFs with lower highs showed relative weakness (non confirmation). These ETFs are also breaking down this week and it looks like the bigger downtrend is taking over. In other words, the advance from March to August was a counter-trend move or correction after the February-March plunge. The recent breakdown reverses this advance and the trend is down. MDY, IJR and IWM broke their 200-day SMAs.

Lagging Long-term, Stalling Medium-term and Breaking

XLU, XLRE

ETFs in this group did not come close to their February highs in June and traded flat the last three months. They failed to get above their 200-day SMAs this summer and formed lower highs from June to August. They are breaking down this week with sharp declines below their 200-day SMAs.

Failed below/near 200-day and September Break Down

XLF, KRE, KBE, KIE, REM, XAR

ETFs in this group did not break their falling 200-day SMAs this summer, formed lower highs from June to August and again from August to September. Even though StochClose (125,5) triggered bullish for some, they show pervasive relative weakness and downtrends since the June highs. Most recently, we are seeing breakaway down gaps.

Well below 200 and mid August Break Down

XLE, XES, XOP, AMLP, MJ

ETFs in this group are in long-term downtrends and are long-term laggards. They bounced from mid July to mid August with rising channel type patterns that retraced around half the prior decline. These ETFs broke down in mid-late August and moved consistently lower in September.

Thanks for tuning in and have a great day!

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