ETF Charts and Setups – Timeframes and Market Caps Collide as Short-term Support Levels Emerge

The mixed market is reflected on the ETF charts with tech-related ETFs hitting new highs and underperforming ETFs testing support levels. Will the leaders pull the laggards up or will the laggards drag the leaders down? Or, do we just need to analyze each chart on its own merits? Probably the latter.

Several ETFs are at a moment of truth as their medium-term breakdowns collide with short-term support and reversal zones. These include small-caps (IWM), banks (XLF), industrials (XLI) and metals & mining (XME). Several others are above their 200-day SMAs and breaking out of consolidation patterns. These include healthcare (XLV), medical devices (IHI), housing (ITB) and retail (XRT).

There are a lot of cross currents in the market right now and earnings season gets underway soon. In addition to covid-related headlines, there are prospects for another stimulus package and hopes for a broader recovery (not just large-cap techs). SPY and RSP capture the cross currents. The cup is half full for the S&P 500 SPDR (above 200-day), but half empty for S&P 500 EW ETF (below 200-day). RSP represents the average stock and SPY represents large-caps. Watch these two for clues on which way the market will break. An RSP move above the 200-day would be broadly bullish, while an SPY move below would be broadly bearish.

Moment of truth for Small and Mid Caps

QQQ surged to another new high and SPY broke above its late June high, but the S&P 500 EW ETF (RSP), S&P MidCap 400 SPDR (MDY) and Russell 2000 ETF (IWM) continue to lag and test support. All three broke their wedge trendlines and are below their 200-day SMAs. Even though they are lagging and looking vulnerable, they are trading in potential bullish reversal zones and their Bollinger Bands are contracting. Basically, a medium-term breakdown is in the making, but short-term support is at hand and upside breakouts could overrule the medium-term breakdowns.  

The first chart shows RSP firming in a potential reversal zone with a bullish engulfing on Friday. I am calling this a potential reversal zone because broken resistance turns support and the decline retraced around 61.8% of the prior advance. This is the area to expect a decline to reverse in a two steps forward and one step backward sequence. A close above 106 would trigger a breakout (late June high, 200-day and upper BBand).

The indicator window shows RSI(14) moving into the 40-50 zone, which acts as momentum support in an uptrend. RSI ticked back above 50 on Friday and momentum could be turning back up. This is a real moment of truth. A bounce and breakout at 106 would negate the wedge break and call for a reassessment, while a break below the June lows would reinforce the wedge break. The next charts show MDY, IWM and XLI with similar characteristics.

Will Banks Play Catch Up?

The Finance SPDR (XLF) and Regional Bank ETF (KRE) are lagging, but also showing signs of resilience with big bounces on Friday. The first chart shows XLF failing at the falling 200-day SMA in early June and falling back to the 23 area. This decline retraced around 61.8% of the May-June surge and carried the ETF back to the breakout zone, which turns support. XLF formed a bullish engulfing on Friday and a breakout at 24 would be short-term bullish.

The indicator window shows RSI firming in the 40-50 zone over the last few weeks. RSI was overbought in early June with the move above 70 and this pullback alleviated oversold conditions. In fact, RSI became mildly oversold. Momentum could be poised to turn up as StochRSI surged above .80 on Friday. Notice how the surge above .80 in mid May preceded a big advance.

The next chart shows KRE hitting the 61.8% retracement level and bouncing on Friday with a long white candlestick. Note that I drew these retracements from the March low to the June high. Drawing on charts is subjective. Thus, it is possible that the falling wedge represents a correction after the May-June surge and a breakout would be bullish. Also notice that RSI is in the 40-50 zone and a StochRSI pop above .80 would show a bullish momentum thrust.

XLV and IHI Hold Breakouts

The Healthcare SPDR (XLV) and Medical Devices ETF (IHI) traded flat from April to June and sprang to life in early July with consolidation breakouts. Even though these two lagged SPY and QQQ from mid April to late June, they were consolidating above their 200-day SMAs and the cup was half full. Notice how RSI firmed in the 40-50 zone for both and StochRSI popped with a surge above .80 on June 30th. Breakouts are in the making and these breakouts signal a continuation of the bigger uptrends.

Housing and Retail Hold 200-day SMAs

The Home Construction ETF (ITB) and Retail SPDR (XRT) represent core parts of the economy and their performance could affect small-caps. Notice that these ETFs are consolidating above its 200-day SMAs as triangles formed. In addition, the Bollinger Bands narrowed as volatility contracted. Both ETFs broke out of their triangles last week, RSI bounced off the 40-50 zone in late June and StochRSI surged above .80 on July 8th. These breakouts are bullish until proven otherwise and breaks below the 200-day SMAs would be bearish.

XME Firms at Support

The Metals & Mining SPDR (XME) is showing signs of resilience as it firms in a potential reversal zone. As with IWM above, XME failed near the 200-day and has a bearish wedge working. Short-term, however, the ETF found support near broken resistance and the 61.8% retracement area. RSI also firmed in the 40-50 zone. Buyers stepped in on Friday with a bullish engulfing and StochRSI surged above .80 to signal a momentum thrust.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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