ETF Ranking and Grouping – More Uptrends and More Overbought Readings

Before looking at the ETF rankings and charts, note that the S&P 500 closed above its 200-day SMA at the end of May and this signaled the all clear for some trend-following and momentum strategies. Many trend-following and momentum strategies are only active when the S&P 500 is in a long-term uptrend because this is when the market environment is favorable.

Trend-following and momentum strategies are not concerned with overbought conditions. They simply buy securities with uptrends and/or the strongest momentum. They hold until the market environment turns unfavorable or the security triggers a sell signal.

A trend-following strategy would sell when the trend turns down. Bearish signals might include a StochClose break below 40, a Keltner Channel (125,2) break or a close below the 200-day SMA. A momentum strategy would sell when the security drops below a certain threshold in the rankings. These exit points are usually quite a ways lower and this is why such strategies also have relatively high drawdowns.

My Index Breadth Model has yet to turn bullish because the long-term indicators are dragging their feet. I still view the market environment is mixed (at best) or unfavorable (at worst). Buying now would be like forcing a three point shot with plenty of time on the clock. It is better to wait for the right opportunity. This means waiting for a fresh bullish signal, such as a StochClose cross above 60. Alternatively, waiting for a pullback in the form of a falling flag, wedge or channel.

Plotting Strength and Weakness

The scatter plot shows the StochClose (125,5) on the y-axis and RSI(14) on the x-axis. There are four outlines representing four different groups. First, we have the green group in the upper right-hand corner. StochClose is above 60 (uptrend) and RSI is above 65. These ETFs are getting extended short-term, but they are in long-term uptrends and leading. ETFs related to tech dominate this group. The blue outline shows four ETFs related to healthcare (IBB, XBI, XLV and IHI). These four are in uptrends overall, but they consolidated over the last few weeks and this is why RSI is lower.

The red zone features the Gold SPDR, Gold Miners ETF and 20+ Yr Treasury Bond ETF. These three fell as stocks continued higher and the Dollar fell. They are clear alternatives to stocks and money flowed out of these three while stocks rose. The yellow zone in the lower right shows the laggards with downtrends. These ETFs are in uptrends since late March and they are getting extended with relatively high RSI values.

ETFs Ranked by StochClose

The image below shows the top 21 ETFs when ranked by StochClose. ETFs at or near new highs are at the top with StochClose values of 99 or 100. IBB, XBI, GLD and GDX are still in the top 20 even though they consolidated the last few weeks. Keep in mind that StochClose covers 125 days and this is around six months. A value above 80 means price is still pretty close to a six month high and the trend is up.  

SPY, the Flag and Expanding 20-day Highs

I will start out with a daily candlestick chart for SPY with 20-day High-Low Percent and StochClose (125,5) in the indicator windows. SPY broke out of its flag with a gap on May 18th, stalled around this break zone for a few days and extended the last eight days (+ 5.87%). The ETF is getting a bit extended short-term and the flag highs mark first support to watch on a throwback. A throwback is a pullback to a breakout zone, which becomes first support. Throwbacks alleviate overbought conditions and create short-term mean-reversion opportunities.

The indicator window shows 20-day High-Low% exceeding +10% on the day of the flag breakout and expanding over the last 11 days. The shading turns green with a move above +10%. The indicator hit 65.9% on Wednesday and this is the highest level in months. The second window shows StochClose moving above 60 a few days after the flag breakout. Technically, a move above 60 signals an uptrend.

Overall, the charts are littered with gaps and flag breakouts in mid May. Flags are short-term bullish continuation patterns and the breakouts are bullish until proven otherwise. Trading flags is tricky because there can sometimes be a throwback to the breakout zone after the initial surge. Short-term traders may wish to consider profit targets to lock in some gains or even tight trailing stops.

New High and Leading


ETFs in this first group recorded 52-week highs this week and they are all related to the tech sector. The trend is clearly up with a 52-week high, but these charts do not show steady and consistent uptrends. The chart below shows the Software ETF (IGV) hitting a 52-week high in late February, a 52-week low in mid March and a 52-week high here in early June. Thus, we have a new high, a 30% decline, a new low, a 45% advance and a new high – all within four months. This does not look like “normal” price action to me.

Even though ETFs in this group are in uptrends and leading, this does not look like a good time to force a shot (trade). The late May low marks support and the uptrend could extend as long as this support area holds (249). Nevertheless, this looks like a time to wait for a bullish setup to unfold, such as a falling flag, wedge or channel.

Consolidating after 52-week High


ETFs in this next group recorded 52-week closing highs in April or May and then consolidated. They are still in uptrends overall and long-term leaders, but are lagging the last three to six weeks because they stalled as stocks moved higher. The first chart shows the Biotech ETF (IBB) with a surge from 93 to 135 and a consolidation the last few weeks. Technically, this is like a flag and it is a bullish continuation pattern. A breakout would signal a continuation higher.

Flags are classical patterns that feature all the old chart books. While a break below the flag low might seem negative, note that IBB is still ripe for a pullback after the monster advance. Thus, a move into the 123-125 area could create a short-term oversold condition for a mean-reversion setup. Personally, I would be more open  to a mean-reversion pullback than a flag breakout.

The 20+ Yr Treasury Bond ETF (TLT) hit a new closing high on April 21st and then corrected with a falling channel. A falling channel is basically a falling flag that overextends its welcome. Falling flags are usually less than four weeks and this decline is around six weeks. Even so, it still looks like a surge and correction sequence. RSI is mildly oversold (38). There are two things to watch. First, a StochRSI surge above .80 would signal a bullish momentum thrust. Second, a move above 167.5 would break the falling channel.

Above 200-day and less than 5% from February High


ETFs in the next group are above their 200-day SMAs and leading, but they have yet to break above their February highs. They are, however, within 5% of these highs. The first chart shows QQQ pretty much equaling its February high. I am not going to call this major resistance though. Instead, I will simply monitor the upswing and mark support at 224 (18-May gap and 27-May low). A break here would reverse the upswing and signal the start of at least a corrective period.

The next chart shows the Semiconductor ETF (SOXX) breaking out of a pennant and moving higher the last four days. The ETF is also near the February high and I am monitoring the uptrend since late March. The late May lows mark support at 241 and a break here would argue for a corrective period.

The Healthcare SPDR (XLV) is also in this group with a surge above the 200-day in April and consolidation over the last six weeks or so. XLV broke out of this consolidation last Friday and this breakout is holding for the most part. Also note that RSI is holding above 50 and the momentum cup remains half full. The Medical Devices ETF (IHI) sports a similar setup.

Above 200-day and less than 10% from February High


ETFs in the next group are above their 200-day SMAs, but still 5 to 10 percent below their February highs. In other words, they are not that close to these highs. The Solar Energy ETF (TAN) is the exception here because it is 19% from its February high. As with most stock-related ETFs, the immediate upswing began in late March and remains up. The first chart shows the Retail SPDR (XRT) with a massive surge punctuated by gaps, consolidations and breakouts. XRT is up almost 20% in the last 14 days and very extended. Can’t touch this (– MC Hamer).

Near 200-day SMA and more than 10% from February High


ETFs in this next group are lagging the others because they are still near their 200-day SMAs and the current upswing has not traveled as far as the others. For example, SPY needs another 8% to exceed its February high while the Russell 2000 ETF (IWM) needs another 18%. The chart below shows IWM with a flag breakout and a 9% gain after the breakout. Even though the long-term picture remains suspect, the breakout is short-term bullish and the immediate trend remains up. The blue zone marks first support to watch and a throwback to this area could provide a mean-reversion opportunity (bounce). The 18-May gap and March trendline mark key support at 125. A close below this level would be quite negative.

The defensive Consumer Staples SPDR (XLP) and the bond alternatives, Utilities SPDR (XLU) and Real Estate SPDR (XLRE), feature in this group as well. These three were lagging three weeks ago because they pulled back as the stock market advanced. Nevertheless, the pullbacks formed falling flag/wedge type patterns and all three broke out with surges the last two weeks. All three are still just below their 200-day SMAs, but money is finding its way into the more defensive end of the stock market.

Below 200-day, but in Short-term Uptrend


ETFs in this next group are in uptrends since late March, but they are still below their 200-day SMAs (long-term downtrends). The first chart shows the Industrials SPDR (XLI) breaking out of a falling flag with a gap-surge on May 18th. The ETF is up some 20% the last 14 days and nearing the 200-day. Despite a show of short-term strength, XLI is getting extended as RSI moved above 70. Overbought and below the 200-day SMA is not a good recipe in my cookbook. This means it is time to wait for a pullback or setup to materialize.

Well Below 200-day, but with Flag Breakout


ETFs in this next group are lagging overall. They are well below their 200-day SMAs and these moving averages are falling. As with most ETFs over the last few weeks, they are in uptrends since late March and recently broke out of flag patterns. The first chart shows the Finance SPDR (XLF) with a flag breakout and a few gaps over the last three weeks. XLF is up 20% in 14 days, but still well below the 200-day SMA. As a general rule, I usually do not attempt to trade short-term bullish patterns when the long-term trend is down.

The next chart shows the Regional Bank ETF (KRE) with a gap-breakout on May 18th and 28% surge the last 14 days. Impressive, but I am not chasing a big move below the falling 200-day SMA.

Well below 200-day, but in Uptrend since Late March


The next chart shows the Metals & Mining SPDR (XME) with a gap and surge on May 18th. The ETF is also up some 20% the last 14 days, but well below the falling 200-day SMA. As with most, I am monitoring the current upswing using the gap and March trendline to mark support.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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