Pattern, Trend and Setup Summary
After correcting most of September, many stock-related ETFs caught a bid the last few days and we are seeing short-term breakouts in several areas. The Solar Energy ETF (TAN) is far an away the leader and the only ETF in the core list to hit a new high. Nevertheless, a handful are knocking on the new high door with pennant breakouts in the making (ITB).
The tech and some healthcare related ETFs are following the lead from QQQ and SPY with breakouts from their corrective patterns. These patterns include falling flags, falling wedges and falling something-or-others over the last three to four weeks.
As noted in detail below, Monday’s gaps hold the key for many of these breakouts. The more that hold, the merrier. The more that fold, the weaker. The breakouts are bullish until proven otherwise and could extend. Failure to hold these breakouts would put the bigger correction scenario in play.
Gold and Treasury bonds are back on the same page. GLD broke down last week and TLT broke down this week. Both are still in long-term uptrends and GLD still has a classic corrective pattern working. A strengthening stock market and weakening Dollar could benefit gold, but would likely be negative for safe-haven bonds.
Elsewhere, small-caps, mid-caps, energy, aerospace-defense, finance, REIT and utility related ETFs continue to underperform by varying degrees and remain off my radar. We have a choice and the choice should be to focus on ETFs that have the strongest price charts and bullish setups.
ETF Grouping and Ranking by Trends, Patterns and Setups
New High after Consolidation Breakout
TAN
The Solar Energy ETF (TAN) is going ballistic and hitting new highs with a 15+ percent surge the last four days. The ETF is also up 35% from its early September low and 200% from its March low. The trend is obviously bullish and we saw an acceleration after the breakout from the small cup-with-handle, which was seen in hindsight. The breakout zone and handle area mark first support to watch should we see a throwback.
New High, Pennant and Breakout
BOTZ, ITB, XHB
ETFs that hit new highs in early September and then stalled with pennants held up better than those that formed falling flag or wedges. Note that pennants, falling flags and falling wedges are continuation patterns that get their bias from the direction of the prior move. ITB surged to a new high before forming its pennant so it is a bullish continuation pattern. This means it represents a correction or rest within the bigger uptrend and a breakout would open the door to a continuation higher. While a break below the pennant lows would be negative, it would not be enough to reverse the bigger uptrend. Such a break would argue for a deeper correction towards the rising 200-day SMA.
Decline from New High, Falling Flag and Breakout
XLY, XLV
ETFs with falling flags formed lower lows from early to mid September. The trendlines are pretty much parallel and these patterns represent mild corrections within bigger uptrends. XLY and XLV fell 8-10% after hitting new highs, and after big advances from March to September. Both broke out with strong advances on Friday and gaps on Monday.
At the risk of getting too short-term, Monday’s gaps hold the first key going forward. A strong breakout should hold and price should continue higher, as it did with the flag breakout in mid May and pennant breakout in early July. A close below Friday’s close would negate Monday’s gap and the breakout. This would be negative and open the door to a deeper correction, perhaps back to the rising 200-day and/or 33% retracement line.
Decline from New High, Falling Wedge and Breakout
SPY, QQQ, XLC, XLP, FDN, IPAY, IHI
There is not much difference between a 3-4 week falling flag and falling wedge. The falling wedge is usually a little steeper and reflects a slightly sharper decline. This is pretty much splitting hairs, of which I have fewer and fewer.
SPY and QQQ sport falling wedges and breakouts, and these are the two most important ETFs to watch going forward. Large-caps are leading small-caps and mid-caps, while large-cap techs set the tone for the technology sector and tech-related ETFs.
SPY and QQQ gapped up on Monday and these gaps are bullish until proven otherwise. A close below Friday’s close would fill the gap and negate the breakouts (call it 128 for SPY and 271 for QQQ). This would then argue for a more extended correction, perhaps back to the 33/50 percent retracement and/or rising 200-day SMA.
Note that SPY advanced some 64% in 114 days and fell around 10% with the falling wedge. Thus far, it has been 20 days since SPY recorded a new high and this is a pretty short correction considering the length of the prior advance.
Sharp Decline, Drift Lower and Breakout
XLK, IGV, SOXX, SKYY, FINX, HACK*
The tech-related ETFs dominate this next group. These ETFs fell sharply in early September and then stabilized or drifted lower the last three weeks. Everyone but HACK* broke above last weeks high. The outsized declines in early September are the biggest concern medium-term because outsized declines can signal the start of an extended trend (more than two months). Short-term, however, these ETFs firmed the last 2-3 weeks and held up relatively well after the outsized declines. Monday’s breakouts are short-term bullish as long as they hold and chartists can cue off of Friday’s close for clues on bullish resolve. SOXX closed at 295.25 on Friday. Rounding lower, I would use 295 as the short-term line in the sand (green line).
Chartists looking to get the jump on a breakout can cue off price chart support and the 40-50 zone for RSI(14). During a pullback, the 40-50 zone acts as a sort of momentum support for RSI. Sometimes RSI dips into the 30-40 zone and ETFs that held the 40-50 zone show less downside momentum (relative strength). Such was the case for SOXX, IGV, SKYY and other tech-related ETFs.
RSI in the 40-50 zone is the first clue for a bounce. The second clue is a test of the prior low. In this case, we are talking about the early September low. SOXX and IGV bounced in mid September and tested these lows last week. The combination of a support test and RSI support zone served as an alert to prepare for a bounce.
Channel Breakout, Throwback and Successful Support Test
IBB, XBI
Now we get to the channel breakouts, throwbacks and bounces in the Biotech ETF (IBB) and Biotech SPDR (XBI). Both retraced just over 33% of their March-July advances with falling channels that came close to the rising 200-day SMA. A decline that forms after a new high and remains above the rising 200-day is deemed a correction within a bigger uptrend. Corrections are expected to end at some point and bullish breakouts signal that the bigger uptrend is resuming. Both broke out with big moves on 14-Sept, fell back to their gap zones with throwbacks and bounced the last four days. These bounces affirm support and keep the breakouts alive. A close below last week’s low would fully negate the breakout.
Decline from New High, Falling Wedge, No Breakout
XRT
The Retail SPDR (XRT) is alone because it did not break out of its falling wedge. Traders are probably waiting for signs that the next stimulus check is in the mail. Whatever the case, XRT hit a new high, corrected with a falling wedge and RSI dipped into the 40-50 zone. It is a pretty mild correction thus far and Monday’s bounce is the first sign that a breakout is in the making. A close below Friday’s close (call is 48.5) would be negative.
Undefined
XLI, XLB
There are always a few ETFs that do not fit within a particular group. Today we have the Industrials SPDR (XLI) and Materials SPDR (XLB). XLB hit a new high on 16-17 September and was leading the market. It was then hit with an outsized decline because the 5-day decline was greater than ATR(5) x 3. ATR is a volatility-type indicator and a 3 ATR (5) decline is abnormal. Notice that an outsized advance started the uptrend on April 9th. It is still early days and XLB is still above the rising 200-day. I will give the uptrend the benefit of the doubt, but steer clear for now.
XLI also has a mixed chart. Technically, the long-term trend is up with StochClose on a bullish signal and price above the 200-day SMA. However, the 200-day is still falling and XLI did not come close to its February high. In this regard, it is lagging all the ETFs mentioned previously. I will give the uptrend the benefit of the doubt here. Short-term, note that Monday’s gap is holding for now and RSI bounced off the 40-50 zone. Thus, XLI is also setting up for a bounce.
Peak in Early August, Decline into Sept, Above 200-day
GLD, GDX, SLV, REMX, TLT, AGG, LQD
The precious metals ETFs and bonds are back together again. ETFs in this group hit new highs in early August (sans REMX), corrected into September and remain above their 200-day SMAs. The eight week declines are still viewed as corrections within a bigger uptrend, but we are seeing more short-term breakdowns. GLD, GDX and SLV broke down last week, while TLT, AGG and LQD broke down this week. Gold is smarting from a bounce in the Dollar and I suspect that TLT is smarting from rising inflationary expectations. Whatever the case, gold and Treasuries remain in corrective mode.
The chart below shows GLD hitting a new high in early August and forming a falling wedge the last eight weeks (38 days so far). The decline retraced 50-67% of the prior advance. Both the retracement amount and pattern are typical for corrections, but the wedge continues to fall. A move above 183 would break the wedge line and fill the big gap from 21-Sept.
TLT fell around 6.5% in August, formed a pennant and broke pennant support with a sharp decline on Wednesday. This signals a continuation of the August decline and targets a move towards the rising 200-day SMA. The bigger trend remains up, but bonds are out of favor right now and a deeper correction may be in order.
The following ETFs are lagging in some way shape or form. Some may be above their 200-day SMAs, but none of them recorded new highs in August-September. Some formed lower highs from June to August and some from August to September. Note that SPY formed higher highs during these periods and also hit a new all time high in September. Basically, these ETFs are off my radar. Put another way, the ETFs mentioned above have stronger price charts and deserve our attention.
Laggard with Brief Break/Test of Falling 200-day and Bounce
RSP, MDY, IJR, IWM, XME
Lagging Long-term, Stalling Medium-term, Breaking Down
XLU, XLRE, REM
Failed below/near 200-day falling and Sept Break Down
XLF, KRE, KBE, KIE, REM, XAR
Well below 200 and mid August Break Down
XLE, XES, XOP, AMLP, MJ
