ETF Ranking, Grouping and Analysis – Separating the Bounce Worthy from the Downside Leaders

Stocks were broad-sided as the stock market fell sharply. Even though the S&P 500 SPDR remains in the falling knife category and has yet to bounce, I am on the look out for ETFs that hold up relatively well during this onslaught. There are several ways to separate ETFs with relatively strong charts and those with relatively weak charts.

First, we can compare the retracements or the depth of the recent declines. Most stock-related ETFs bottomed with the broad market in early October and moved higher into January-February. Some peaked in January and fell the last six weeks or so. All stock-related ETFs fell the last five days. ETFs that peaked in January and retraced over 61.8% of their prior advance are not holding up well. ETFs that peaked in February and retraced less than 50% of their prior advance are holding up well, relatively well.

Second, we can compare price relative to the 200-day SMA. ETFs that held above their 200-day SMAs are performing better than those that broke below. The S&P 500 SPDR held well above its 200-day SMA, but the S&P 500 EW ETF (RSP) broke below its 200-day. Third, we can compare RSI(10) values. The lower the RSI value, the deeper the recent pullback and the stronger the downside momentum. For example, RSI(10) for the Biotech ETF (IBB) did not dip below 30 this week, but RSI(10) for the Homebuilders ETF (XHB) hit 23.

Note that I wrote this commentary before the open and then updated the chart images just after the open.

ETFs to Watch

  • The Nasdaq 100 ETF (QQQ) and Software ETF (IGV) are holding up relatively well.
  • The Biotech ETF (IBB) did not become oversold.
  • The Gold Miners ETF (GDX) is testing its breakout zone.
  • The Russell 2000 ETF (IWM) extended its 2020 decline.

Preparing for the Coronavirus to Hit Home

Most European countries have a one-week winter break with no school and family getaways. Some families go skiing and others look for some winter sun (Tenerife). It is currently “Krokus” vacation week here in Belgium and families will return this week. Area hospitals are bracing for this return by creating special Coronavirus wings.  

People from all over Europe converged on vacation destinations over the past week or so. This diverse group will mingle and then return home in the coming days. Thus, the spread of the virus outside of China is likely to get worse before it gets better. Also note that some 1000 holiday makers are in quarantine at a Tenerife hotel where an Italian doctor was diagnosed with the virus.

It seems that the market is discounting the spread of the virus throughout Europe and the US now (declining). The market is a forward looking beast and will start to discount the end of the coronavirus at some point. I could try to time the news flow and the evolution of the virus, but it is probably better to just focus on the charts.

Bottom Picking with SPY

Today we will start with the single most important chart for the stock market: the S&P 500 SPDR (SPY). Why? Three reasons. First, the S&P 500 accounts for some 80% of the total US stock market. Second, it is by far the most widely follow barometer for US stocks. Third, the 200-day SMA actually has some value when it comes to turning points. The S&P 500 is in a free fall and the broader market (most ETFs) will bounce when the S&P 500 bounces. But when?

The knife is falling and the blade is pointing down, which makes bottom picking a risky business. Then again, there is always risk in the financial markets. As far as bottom picking, I will choose the 305 area, give or take 5 points. This equates to 3050 for the S&P 500, give or take 50 points. The green shading on the chart below marks the bounce zone. I picked this zone because it is near the 61.8% retracement and rising 200-day SMA. In addition a decline to 305 would means SPY is down 10% from its high (oversold). SPY bounced in February 2018 after a 10% decline.

The idea is for an oversold or mean-reversion bounce in the 305 area, but not an end to the correction. As noted in Wednesday’s commentary, stocks have been broad sided and time is needed to stabilize (at least two months). An oversold bounce, should it materialize, could carry SPY back to the 320-325 area. Chartists looking to play a mean-reversion bounce should plan their trade and then trade that plan. Profit targets are often used in mean-reversion strategies, as opposed to trailing stops. For example, one could buy if SPY hits 305 or RSI(10) moves above 30 and sell when RSI(10) moves above 50.

Breakout, Surge and New High


Needless to say, it is all about the 20+ Yr Treasury Bond ETF (TLT) and Gold SPDR (GLD) here in February. These two are clear alternatives to stocks and both are benefitting as money moves out of the stock market. Note that the Russell 2000 ETF peaked some five weeks ago and SPY peaked five days ago.

TLT broke out of a big falling wedge in mid January, formed a bullish pennant in February and broke out of this pennant on 18-Feb. TLT hit a new high this week and is clearly leading the pack. While trend and price action are clearly bullish, TLT is in the monitoring stage after a 10+ percent advance year-to-date. Monitoring means I am just watching price and waiting for the next bullish setup.

GLD broke out a few weeks earlier than TLT with a move out of the falling wedge in late December. After stalling from early January to early February, GLD took off the last three weeks and hit a new high on Monday. The test of the January low and RSI bounce in the 40-50 zone provided the last bullish setup. Now it is time to wait for the next one.

Breakout, New High and Throwback


The Gold Miners ETF (GDX) also hit a new high on Monday, but is not quite as strong as gold. GDX broke out of a triangle last week and fell back to the breakout zone this week. Broken resistance turns first support and this is the first area to watch for a bounce.

Breakout and Cold Feet


I don’t usually focus on silver because I trust a 100 ounce bar about as far as I can throw it. The Silver ETF (SLV) is still tied to industrial metals and the Metals & Mining SPDR (XME) hit a new low this week. SLV broke out, but did not come close to a new high and fell back to the breakout zone, which turns support. RSI is also in the 40-50 zone, which is mildly oversold. Even though this is a setup for a bounce, be careful because silver is a tricky one.

Shallow Retracement after New High


The first group of equity ETFs hit new highs in February and remain well above their rising 200-day SMAs after recent weakness (so far). They also retraced less than 50% of the prior advance. These are holding up the best and could lead if/when we get an oversold bounce in SPY.

The first chart shows QQQ falling around 9% and piercing the 38.2% retracement as RSI(10) dipped below 30. Needless to say, there are a zillion mean-reversion setups in the market right now. If I had to pick a bottom picking zone, I would watch the 205 area because the 61.8% retracement and early December dip are here. The second chart shows IGV with similar characteristics.

Relative Safety?         


We think of Utilities, Staples, REITs and high-yield stocks as safety nets, but they are still stocks and not always immune to broad market selling pressure. They often just decline less. On the chart below, notice how XLU and XLRE peaked ahead of the stock market in late 2017 (blue arrows) and fell sharply with the market in early February 2018. They also fell sharply in December 2018 and over the last five days (blue zones).

XLP and VIG are more aligned with SPY and the broader market. Both peaked in late January 2018 and fell sharply in the first quarter of 2018. XLP managed a higher high in November 2018, but plunged to a new low the following month. VIG hit a 52-week high in September 2018 and a 52-week low a few months later. Bottom Line: not many stocks are immune to broad market weakness (aka a sharp decline in the S&P 500).

Shallow Retracement


Some healthcare-related ETFs are holding up better than average. Among them, the Biotech ETF (IBB) hit a new intra-day high last week and fell some 5% Monday-Tuesday. Not too bad for a biotech ETF. In addition, the ETF remains above the 31-Jan low and has yet to forge a lower low. Downside momentum was limited because RSI did not become oversold (<30).

Lower High, Lower Low and Normal Retracement


The Medical Devices ETF (IHI) is clearly weaker than IBB because it formed a lower high and broke the 31-January low. In addition, RSI hit 24 and moved well below 30. Even so, IHI is nearing a potential reversal zone in the 250 area. The 61.8% retracement, rising 200-day and broken resistance zone mark this area.

Still above 200-day and 61.8%


The next group of ETFs recorded new highs last week and then plunged this week. Despite this plunge, they did not exceed the 61.8% retracements (yet) and remain above their rising 200-day SMAs. The chart below shows the Mobile Payments ETF (IPAY) gapping up in early February and gapping down this week. While not a picture perfect island reversal, the gaps match and it is a short-term reversal. The blue zone marks a convergence of the 61.8% retracement, the rising 200-day and the early December pennant. This is an area of possible support that could give way to a mean-reversion bounce.

Moved below 200-day SMA or 61.8%


Now we get to the weak end of the core ETF list, and it is growing fast (25 names and counting). The first group of weaklings broke their 200-day SMAs or exceeded their 61.8% retracements. Even though they hit new highs in February, the retracements were relatively deep and showed above average selling pressure. As you can see from the list, there are some big names/sectors: Consumer Discretionary SPDR (XLY), Industrials SPDR (XLI) and Finance SPDR (XLF). The first chart shows XLI hitting a new high in mid February and plunging below the 200-day (and 61.8% retracement). RSI may be oversold, but XLI is not preferred for an oversold bounce because it is leading on the way down.

The Insurance ETF (KIE) and Aerospace & Defense ETF (XAR) were in steady uptrends just two weeks ago as both hit new highs in mid February. They are suddenly questionable with breaks below their 200-day SMAs and declines that exceeded the 61.8% retracements. KIE is, however, trading in a possible support zone and oversold.

Lower High, Lower Low and Below 200-day SMA


The next group of ETFs started weakening ahead of the S&P 500 SPDR and clearly broke down this week. Most formed lower highs and lower lows over the last one to three months. They are also trading below their 200-day SMAs and some have falling 200-day SMAs. The 200-day SMAs for KRE and KBE turned down in mid February, while the 200-day turned down for XRT in late January. The 200-day for IWM turned down on Tuesday.

The chart below shows just how worthless the 200-day crosses are for IWM. Sure, the October cross above worked, but the other eight did not. I use the 200-day as a reference point to compare against other ETFs. IWM is below the and this makes it weaker than SPY, which is well above. Also notice that IWM formed a lower high and lower low this year.



The remaining ETFs are n clear downtrends with fresh 52-week low. The Oil & Gas Equipment & Services ETF (XES) attempted and upturn in mid February, but MACD moved back below its signal line on Monday as XES fell to fresh lows.

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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