ETF Trends, Patterns and Setups – Flag Failures, Risk Aversion, Defensive Sectors Shine, Big Advances lead to Big Corrections(Premium)

The market remains defensive overall. There were flag breakouts in a number of tech and growth ETFs last week and these breakouts are failing this week. Once again, the tech and growth ETFs are leading the way lower. Even though these ETFs are down sharply over the last six weeks, the declines still look like corrections within bigger uptrends. The mid March highs provide the first resistance levels to watch going forward.

Defensive ETFs are picking up the slack with breakouts in the Healthcare Providers ETF (IHF) and Consumer Staples SPDR (XLP). The Utilities SPDR (XLU) and Real Estate SPDR (XLRE) are also strong lately, but the charts for these two are more convoluted. We are also seeing the Industrials SPDR (XLI) and Materials SPDR (XLB) hold up relatively well. Both hit new highs in mid March and their pullbacks are relatively tame. Perhaps this is why the pullback in SPY also looks relatively mild thus far.  

You can learn more about my chart strategy in this article covering the different timeframes, chart settings, StochClose, RSI and StochRSI.

Channel Breakout mid March, New High


The Healthcare Providers ETF (IHF) gets top honors today because it corrected with a falling wedge from early January to early March, broke out two weeks ago and hit a new high this week (closing basis). Not many stock-related ETFs hit new highs this week. For reference, the red line shows the ATR Trailing Stop, which is 2.5 ATR(22) values below the highest close since the breakout. I set it at 2.5 so it starts just below the wedge low.

Consolidation Breakout, New High, Short Pullback


The Industrials SPDR (XLI) took the lead in February-March with a consolidation breakout on February 19th and a move to new highs in March. XLI fell back with the rest of the market, but this pullback started from a new high and is relatively tame. This chart also shows two examples of flags that failed and then succeeded (early October and early January). Successful flags look great in textbooks, but the reality can be a lot different.

The Materials SPDR (XLB) formed a triangle within a long-term uptrend and broke out on March 8th. Charting with dots (closing prices) allows me to draw exact trendlines and see the exact breakout. This reduces subjectivity. The lows around near the triangle apex mark first support. I would not turn bearish on a break below 73, but I do view this as a possible reversal zone to watch should we see a pullback.  

Early March Flag Breakout, New High, Short Pullback


The Home Construction ETF (ITB) broke out of a large triangle in January, hit new highs into February, fell back with a small wedge and broke out again on March 5th. The candlestick chart in the lower right shows the breakout details with a long white candlestick breaking above the flag trendline and StochRSI popping above .80 (green line). The pullback pattern looks like a falling wedge on the close only chart. Falling wedge or falling flag – it does not matter because both are short-term bullish continuation pattern. The red line marks the ATR Trailing Stop for reference.  

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

The Residential REIT ETF (REZ) is also quite strong as the dot chart shows a channel breakout on January 15th and surge to new highs in March. The candlestick chart in the lower left shows a wedge pullback and breakout on March 8th. Notice that StochRSI popped above .80 two days later. This is why we need more than one indicator for a short-term bullish catalyst. Sometimes we get a candlestick reversal first, sometimes a pattern breakout and sometimes a StochRSI pop. Returning to the dot chart, REZ pulled back with the rest of the market, but remains in an uptrend and I am just waiting for the next setup.

Very Extended since early Feb to Mid March, Pullback


The Regional Bank ETF (KRE) led the market from late September to mid March and from early February to mid March with some seriously obscene gains, 110% and 30%, respectively. The current pullback is the steepest since late January and remains in the falling knife category. RSI is in the oversold zone and the decline retraced 33-50 percent of the February-March advance. This means we could see some firming or even an oversold bounce soon. However, I do not see a setup on the candlestick chart yet. Notice that the ATR Trailing Stop based on the pennant breakout triggered.

Zigzag Higher Since November, Above Early March Low


The S&P 500 SPDR (SPY) continues to zigzag higher with a new high last week and a pullback this week. SPY remains above the early March low and is outperforming ETFs that broke this low. Even though the trend is clearly up, the swings are getting bigger and volatility is increasing (since late January). SPY is up over 20% from its late October low without a decent correction. We have just seen pullbacks and the market is overdue for a corrective period. The candlestick chart shows the flag breakout and throwback to the breakout zone. This puts SPY at its moment of truth for the breakout because a strong breakout should hold. A close below 384 would negate the breakout.

You can learn more the StochClose indicator and strategies in this post.

Very Extended early Feb to mid March, Sharp Pullback


This chart shows the US Oil Fund (USO) as the dot chart and the candlestick chart in the lower left. Spot Light Crude ($WTIC) is shown in the upper right (long-term chart). Notice that crude hit a big resistance zone after a 76% gain from late October to mid March. Clearly, crude has gotten back to normal and the going could get tougher with resistance at hand. The indicator window shows normalized ROC, which is the 5-day absolute change divided by 250-day ATR. The 5 day decline was more than 3 ATRs and this represents an outsize decline, which is a shock to the uptrend. Such a move after an extended advance signals that an extended correction or reversal is underway.

The Oil & Gas Equipment & Services ETF (XES) and related ETFs are all quite oversold after big declines the last two weeks. These declines could give way to oversold bounces, but I do not see a short-term setup on these charts. For reference, the pullbacks in January and February ended as the declines slowed and little “w” patterns formed. Price then broke the intermittent high (red shading) and the advance resumed.

Consolidation within Uptrend


The Water Resources ETF (PHO) sports a bullish continuation pattern on the dot chart (Ascending Triangle) and a bullish setup on the candlestick chart (flag). This is an example of a short-term bullish setup within a medium-term bullish pattern. RSI is also in the oversold zone because it turned blue. A break above Wednesday’s high would trigger a flag breakout and argue for a continuation of the early March bounce. This could then lead to an Ascending Triangle breakout.

Surge off 200-day, Channel Breakout


The Consumer Staples SPDR (XLP) came to life as the market turned defensive. The first chart shows XLP surging off its rising 200-day SMA, breaking out of a channel and exceeding its February highs. StochClose also turned bullish on this breakout and RSI broke above its resistance zone.

The next chart shows XLU dipping deeper below its 200-day and then surging above the channel trendline with a big move. XLU is firmly back above its 200-day SMA, but StochClose remains bearish. There is a breakout in the making and XLU could attract interest as long as the broader market remains defensive.

Zigzag Higher Since November, Broke Early March Low


The Russell 2000 ETF (IWM) led the major index ETFs from late September to mid March with a biggest gain and hit a new high two weeks ago. IWM is now leading on the pullback as it broke its early March low with a sharp decline. Technically, a lower low is the first step towards a downtrend (a subsequent lower high is the next). The candlestick chart shows two long black candlesticks over the last two days. The first started with a gap down and continued lower. The second started with a positive open, but quickly reversed and fell sharply. This is a failed breakout and it looks like IWM is poised to move into corrective mode after a 60+ percent advance.

Flag Breakout Working, Moment of truth


ETFs in this group are at a moment of truth. They have flag/wedge breakouts working and these breakout zones are being tested. A strong breakout should hold. A weak breakout folds. The first chart shows QQQ breaking its late January and early January lows in during the February-March decline. ETFs that held these lows held up better and QQQ shows relative weakness. QQQ also lagged on the rebound because it did not exceed its early March high (red line). The candlestick chart shows more detail and we can see that QQQ hit resistance after a 50-67% retracement. The breakout zone is holding with the line in the sand at 310 (green line). A close below 310 would negate the breakout and put QQQ in corrective mode again.

Lower High Feb-Mar, Broke Early March Low


The Mobile Payments ETF (IPAY) is all over the place, which is nothing new for this ETFs. The blue outlines show prior occurrences when IPAY broke support with a sharp decline and then surged to new highs. I am not calling for the same right now though. IPAY formed a lower high and broke below the early March low. This is a downtrend within a bigger uptrend and considered a correction. The flag breakout on the candlestick failed miserably and there is not short-term setup right now. I will just wait to see if a short-term setup materializes.

Failed  Bounce, Failed Breakout


The biotech brothers are acting pretty much like the tech and growth related ETFs. The dot chart shows the Biotech ETF (IBB) plunging to a support zone in early March. Broken resistance, the 67% retracement zone and the rising 200-day SMA all converge in the 144-147 area. IBB bounced with a surge above 157, but did not hold this bounce and fell all the way back to the early March lows. There is still a big support zone in the 144-147 area and the big trend is still up. At this stage, I would look for two things: an RSI break above the red resistance line and a price break above the mid March high. The candlestick chart shows the failed flag breakout and I do not see a short-term bullish setup working.

Broke January Lows, Weak Bounce, Sharp Downturn


The tech related ETFs dominate this group. They broke their January lows and turned negative for the year with the decline in late February-early March. These ETFs then bounced, but this bounce lasted just three days for many (March 9 to 11). In contrast, QQQ bounced for seven days (March 9 to 17). The three day bounces did not come close to their early March highs as these ETFs turned sharply lower the last one to two weeks and are leading the way lower again. Despite some big losses the last six weeks, these declines are still viewed as corrections within bigger uptrends. Yes, the bigger trends are still up. In addition, most of these declines retraced around 1/2 of the prior advance. Thus, it is still possible for a two steps forward and one step backward sequence.

The chart below shows the Cloud Computing ETF (SKYY) with a 3-day bounce, a peak on March 11th and a sharp decline the last two weeks. This decline is considered a correction because the trend indicators are still bullish. SKYY is above its rising 200-day and StochClose is bullish. SKYY was up some 47% from late October to late February and entitled to a correction. The higher they fly, the faster they fall. The 15+ percent decline retraced around half of this advance. At this stage, the bounce-decline sequence the last few weeks establishes the first resistance zone to watch. A breakout at 100 would reverse the overall decline and signal an end to the correction. Chartists can also watch RSI because it failed at 50 from late February to late March. A break above 50 would be bullish for momentum.

Broke January Lows, Weak Bounce, Sharp Downturn


The Clean Energy ETF (PBW) and Solar Energy ETF (TAN) charts are similar to the ETFs above. PBW is down over 30% from its February high and this decline retraced 1/3 to 1/2 of the prior advance (upper left chart). Note that the prior advance was from March 2020 to February 2021 and PBW gained around 500%. A 1/3 to 1/2 retracement is still within the realm of normalcy. Prior to the current decline the longest pullback in PWB lasted just eight days (late October). PBW was long overdue. As with SKYY and others above, PBW established a reaction high with the bounce and decline the last few weeks. This is the first resistance level to watch going forward. A breakout here and an RSI break above 50 would provide the first signs that the correction is ending.

ETFs from here are lagging over the last few months or in downtrends. Note the gold and Treasury bonds are still the weakest of all right now.

Downtrend: TLT, AGG, LQD, GLD, GDX

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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