ETF Trends, Patterns and Setups – Breakouts Hold and Uptrends Extend as RSI Reaches New Extremes

There are not a lot of setups this week because most equity-related ETFs moved higher the last two to three weeks. Most, but not all. There are still some setups working in XLU, REZ and ITB, but these three are lagging over the last few months. We are also seeing some relatively fresh breakouts in XLI and XAR, as well as hard throwbacks in GLD and SLV. These four are still in setup territory. Their charts are covered below.

There is overbought and then there is OVERBOUGHT. The table below shows 25 ETFs in which RSI(14) exceeded 80 at some point this year (eight trading days). There are 117 ETFs in the Core list and this represents 21% of the list. 70 is garden variety overbought that can lead to more strength. 80 represents a seriously overbought condition that can foreshadow a corrective period in the coming days or weeks.

The correction is coming, but so is winter, eventually. Signs of frothiness continue to build in the stock market and corrections are normal in bull markets. Timing such corrections, however, is quite the challenge because the market is busy pricing in the near future.

Note that I added a video to the explanation page for the ETF Ranking, Trends and Setups table. Click here.

New High, Strong and/or Steady Uptrend


There are some seriously strong uptrends out there and quite a few extended ETFs. The chart below shows the Semiconductor ETF (SOXX) with one of the steadiest and strongest uptrends since April. Notice how this uptrend is punctuated with short consolidations (bullish continuation patterns) along the way. The December pennant was the last such pattern and SOXX broke out on December 30th. RSI moved back above 70 and hit its highest level since November 2017. Back then, SOXX pulled back for two weeks and then resumed its advance. This extreme RSI reading shows some seriously strong upside momentum, but also creates conditions ripe for a corrective period.

The next chart shows the Retail SPDR (XRT) with RSI reaching 82.62 on January 12th. This is the highest reading in over 10 years and the first time RSI has been above 80 since April 2010. XRT bottomed in November 2008 and rose some 200% by April 2010. A correction then unfolded from May to August. XRT is currently up some 170% from its March low and sporting one of the strongest uptrends in the Core ETF list. The ATR Trailing Stop continues to hold as buying pressure remains strong.

The next chart shows the Clean Energy ETF (PBW) with the yellow shading showing when RSI is above 80. Such readings do not usually give way to long-term trend reversals, but they do increase the odds for a corrective period or pullback. This is not a reason or signal to turn bearish or sell short. These RSI extremes just warn us to be prepared for a corrective period.

RSI values are also relative to the underlying ETF. RSI can easily get above 80 in high octane names like PBW and TAN, but we do not often see such readings in ETFs with lower volatility, such as IHI and XLU. The chart below shows IHI with another strong and steady uptrend. RSI got above 75 on January 8th and then fell back below 70. The uptrend in IHI does not look as extended as the others because it has room to go before reaching the upper line of the rising channel.

New High, Market Leading Surge since November


The next group of ETFs are leading since November with strong advances the last ten weeks. The first chart shows IWM exceeding the upper line of a rising channel with the breakout on November 9th and then extending sharply higher. A tight rising channel formed and IWM continues to hold the ATR Trailing Stop. RSI exceeded 75 this week and hit its highest level since February 2019. Note that IWM was up some 26% from late December 2018 to late February 2019 and then corrected in March. IWM is currently up some 38% without a correction of any kind the last ten weeks.

The next chart shows the Regional Bank ETF (KRE) with a 75% gain from late September to mid January. RSI exceeded 75 this year and hit its highest level since November 10th, 2016. KRE continued higher for another month and then corrected in mid December 2016. The only play here is to trail a stop and ride the advance until it bends.

You can learn more about ATR Trailing stops in this post, which includes a video and charting option for everyone.

Early November Breakout, Stair-step Higher


The next group of ETFs broke out of two month consolidation patterns in early November and then worked their way higher in a stair-step fashion, kind if like grinding higher. There are three clear advances and two corrections/breakouts on the SPY chart. The first advance was 53 days and 45%, and the second was 47 days and 19%. The third started with the low on October 30th and advanced 16.7% in 50 days. The tight channel defines the immediate uptrend and a break here could signal the start of a corrective period.

November Breakout, Extension Higher


ETFs in this next group broke out in November and extended higher. The chart below shows the DB Agriculture ETF (DBA) with two pennants after the November breakout and two pennant breakouts. These are quite short-term in nature and the pullbacks were not deep enough to push RSI into the oversold zone (30-50). DBA is just short of a 52-week high, but it is a leader since November and rising agriculture prices could contribute to inflationary pressures.

Early Dec Breakout, Flag/Throwback, Breakout


The next group of ETFs comes from the tech sector. They sport consolidation patterns into November, December breakouts, throwbacks with falling flags and flag breakouts. These flags are quite short-term and prone to whipsaw with a little noise (volatility). Nevertheless, the breakouts are holding and they are bullish as long as the flag lows hold. The first chart shows the Internet ETF (FDN) hitting a new high after the December breakout and then falling back to the breakout zone with the falling flag. RSI dipped into the oversold zone during this throwback and FDN broke out last week.

The next chart shows the Software ETF (IGV) with a hypothetical scenario (possibility). The flag breakout is holding for now and this scenario remains unrealized. It is just something to consider when planning a trade.

December Consolidation, Breakout, Extension


The next group of ETFs consolidated in December and broke out with strong moves in late December or early January. The consolidation patterns look like bull flags or triangles and the breakouts signal a continuation of the bigger uptrend. At this point, the breakouts are bullish until proven otherwise. Those managing a trade can consider a profit target and/or an ATR Trailing Stop. There is nothing wrong with taking profits on part of a position and then setting a stop-loss to insure the total trade does not turn into a loss.

The first chart shows XLF breaking out in late December and advancing some 7% after the breakout. For short-term traders, this is an area to consider taking profits on part of the position and/or applying the ATR Trailing Stop, which is shown on the chart for reference. The breakout is fairly young and could have further room to run before getting seriously overbought. RSI has been above 70 for just five days and sometimes flirts with the 70 area for several weeks.

December Consolidation, Breakout


The next group of ETFs also consolidated in December and broke out, but they have not really extended after their breakouts. Even though they are lagging to some degree, their breakouts are bullish and higher prices are expected as long as the breakouts hold. There is no sense using the ATR Trailing Stop because the consolidation lows are close and can be used to mark support (a re-evaluation level). The chart below shows the Industrials SPDR (XLI) with a rather long falling flag and a breakout on January 6th. The consolidation lows mark support at 86. While a break here would negate the flag breakout, it would not be enough to affect the bigger uptrend.

Market Leading Surge since November, Oversold Bounce


The energy-related ETFs also consolidated in December and broke out in early January with big moves this year. The first six ETFs in this group are energy related and they have strong positive correlations. They are also following the DB Energy ETF (DBE) quite closely and future performance will likely be linked to the oil complex (gasoline, crude, diesel, natgas). The chart below shows DBE with a big breakout in mid November and three small consolidations along the way. The last formed into late December and DBE broke out on January 5th. There is no setup here, just trade management if you are long (profit target, trailing stop or exit level).

New High in Oct, Consolidation within an Uptrend


The Home Construction ETF (ITB) continues to lag the broader market as it stalls with a narrowing consolidation. The Bollinger Bands (not shown) are also narrowing as volatility contracts. Such volatility contractions give way to volatility expansions, but ITB cannot seem to sustain the gain. The ETF surged during the day on the heels of good earnings from KBH, but fell back by the close and could not hold the gains. Overall, the pattern or setup is unchanged. This is still viewed as a consolidation within an uptrend and a bullish continuation pattern. I suspect that the reopening of the economy and rise in Treasury yields is putting off the bulls. Nevertheless, a breakout to the upside would signal an end to this consolidation and a resumption of the uptrend.

Slow Uptrend since April, Falling Wedge since mid November


Then Utilities SPDR (XLU) and Residential REIT ETF (REZ) have similar patterns at work and both are considered bond proxies because of their relatively high yields. Their charts are also quite similar with rising channels since April and pullbacks since mid November. They are lagging the overall market, but the falling wedges look like corrections after the prior surge and breakouts would be bullish.

Breakout at Make or Break Level


The Gold SPDR (GLD) is at its moment of truth: either this is a hard pullback or a failed breakout. GLD broke out on January 4th and then fell back to the rising 200-day with a sharp decline. This decline also retraced 2/3 of the December advance and puts GLD at a make or break level for this pullback. Failure to hold 170 would suggest that this is a failed breakout – and that the bearish StochClose signal was right (and that my audible call for a bullish breakout was wrong). The Silver ETF (SLV) is pretty much in the same boat.

Other ETFs and Groups:

December Consolidation and No Breakout: XLC, XLP, REM

Stuck in a Range since June: XLRE

Big Falling Wedge to 67% Retracement: TLT

Downtrend or Flat since August: AGG, LQD, GDX

Long-term Downtrend, Oversold: UUP

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
Choose a Strategy, Develop a Plan and Follow a Process

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