ETF Ranking, Grouping and Analysis – Some Shaky Breakouts and the Next Big Move

Large-caps and large-cap techs continue to lead in January 2020, and housing came back to life this month. The Home Construction ETF is the leading gainer this month with a 8.35% advance. The Cloud Computing ETF and Software ETF are not far behind with ~7.6% advances. Overall, 15 of the ETFs in the core list (60) are up more than 5% this month. Another 15 are up between 2 and 4 percent. Thus, over half the ETFs in the core list are up over 2% so far this month. This easy pickings situation will not last forever.  

Despite broad strength, some ETFs are looking shaky after their short-term breakouts. These ETFs broke out of consolidation patterns over the last few weeks, but their post-breakout extensions were not that strong. With the broader market looking ripe for a corrective period at some point, these ETFs could be vulnerable and should be watched closely. This group includes MDY, IWM, XLI and IBB.

We all know where the big moves were over the last three to four months. Now we need to find the next big move. While it is certainly possible that current leaders continue to lead, I am not seeing setups on the charts and many look quite extended (QQQ, XLK, IGV). The next big moves may come from the ETFs that are setting up and/or breaking out now. XLRE set up in late December and broke out. XLU set up in early January and broke out. The 20+ Yr Treasury Bond ETF is setting up right now and breaking out, and could be the next big mover. The Gold SPDR and Gold Miners ETF broke out around Christmas and are setting up with short-term breakouts.

ETFs to Watch

  • SPY is up since mid October and QQQ is up 21% (frothy)
  • XLF is locked in a tight consolidation since mid December
  • KRE and KBE formed falling wedges the last five weeks.
  • XLE broke wedge support this week.
  • GDX, GLD and SLV have small falling wedges working.
  • TLT and AGG broke out of big falling wedges.

Seriously Strong Uptrends and Extending

SPY, QQQ, XLK, XLC, XLV, SKYY, HACK, FINX, IPAY, IGV, SOXX, REM, IHF, IHI

The list of ETFs in strong uptrends with big advances over the last 3-4 months is long. In addition, it is dominated by large-caps and Technology. QQQ is up over 20% from its early October low (77 days) and the pullbacks during this surge were limited to just a few days. RSI(10) has been above 70 for 24 of the last 25 days. In addition, RSI has spent most of its time above 70 since early October. It is an incredible run and QQQ is surely extended, but there are no signs of a short-term reversal yet.

The Software ETF (IGV) and Semiconductor ETF (SOXX) are leading within the Technology sector. SOXX is up around 25% from its October low and IGV is up around 20%. Both recorded 52-week highs again this week. As strong as they look long-term, they are also quite extended short-term as both are up over 10% the last six weeks.

The Software ETF (IGV) and Semiconductor ETF (SOXX) are leading within the Technology sector. SOXX is up around 25% from its October low and IGV is up around 20%. Both recorded 52-week highs again this week. As strong as they look long-term, they are also quite extended short-term as both are up over 10% the last six weeks.

The Medical Devices ETF (IHI) took off over the last two weeks with a small flag breakout and 5% surge. As with most of the ETFs in this list, IHI bottomed in early October and moved steadily higher since this low. RSI moved above 70 several times since November and is currently above 80. Even though I see nothing but strong uptrend, the steepness of this advance argues for some caution going forward.

ETFs in this group are strong, perhaps a bit TOO strong. While I do not expect a reversal of the long-term uptrends, the short-term uptrends are ripe for a rest or corrective period.

Strong Uptrend and Extending

RSP, MTUM, USMV, XLU, FDN, TAN, VIG, IEMG, EFA

The ETFs in this group are also strong and extending higher. I am also seeing signs of excess building as some of these moves accelerate. An upside acceleration off a low is bullish, while an upside acceleration after an extended advance is suspect and should be viewed with caution. Such a move smacks of a blow-off top. Again, I am not looking for a major top. Instead, this latter stage acceleration shows excess that could lead to a corrective period sooner rather than later. The first chart shows the S&P 500 Momentum ETF (MTUM) surging some 5% the last ten days and RSI(10) moving above 89.

Even the S&P 500 Minimum Volatility ETF (USMV) caught a strong bid with a 3.7% surge the last ten days. RSI(10) moved above 87. RSI last exceeded 87 in 26-January-2018 (cue Twilight zone music). We all know what happened in January last year. Also note that RSI moved above 87 on 24-February-2017 and USMV then traded sideways the next six weeks.

Uptrend and Recent Breakout

ITB, XHB

The Home Construction ETF (ITB) and Homebuilders ETF (XHB) could also be classified in the “slow and steady uptrend” group, but there is a clear consolidation breakout over the last two weeks. Thus, they get their own group. As noted two weeks ago, both were moving lower within their consolidations and broke out with a pop on January 8th. This pop extended as both broke above their consolidation highs last week. Both hit new 52-week highs and are clearly in bull mode.

Slow, Steady and Choppy Uptrends

XLY, XLP, XLB, XLRE, KIE, XAR, IYR, PFF, HYG

ETFs in slow and steady uptrends are just working their way higher with relatively modest advances. A 10% advance since October is a relatively modest advance here in January 2020. Note that SPY is up 13.5%, while QQQ, XLK and IGV are up over 20%. It is all relative. These ETFs with slow and steady uptrends recorded new highs in January (except _XLRE), and they are up between 3 and 10% since early October.

The first chart shows the Consumer Discretionary SPDR (XLY) breaking out of a big Ascending Triangle in late December and hitting new highs. XLY is less than 3% above its July high, which is not much to show for six months of trading. Nevertheless, we must analyze the structure of the price chart. Price held above the rising 200-day SMA in the summer, XLY formed higher lows and the general direction is up over the last eight months. Short-term, XLY is holding above breakout zone around 123-124. Home Depot (HD) accounts for 10.36% and reports tomorrow. Next week is BIGGER because Amazon (AMZN) accounts for 23.75% and reports earnings after the close on January 31st.

The Real Estate SPDR (XLRE) is around 3% above its June high, but still below its August-October highs. XLRE has not done much since summer, but remains in an uptrend overall and with a breakout in late December. The ETF hit a new high in October and pulled back to the rising 200-day with a falling wedge. This was viewed as a normal correction within a bigger uptrend and the ETF broke out to end the correction. The early January low and 200-day mark support in the 38 area.

Falling Wedge Breakouts

GDX, GLD, SLV, AGG, TLT

The Gold SPDR (GLD), Gold Miners ETF (GDX) and Silver ETF (SLV) broke out of falling wedge patterns around Christmas and the bond ETFs are following suit with falling wedge breakouts recently. I do not know why bonds and gold are positively correlated, and I do not want to search for the reason. It is what it is. These ETFs simply sport similar chart patterns: falling wedge corrections after big advances and falling wedge breakouts. GLD, GDX and SLV are stronger because they broke out a few weeks ago.

GLD hit a new high in early January, corrected with a short pullback and broke out with a move higher the last five days. GDX also broke out, but did not hit a new high. The ETF fell back to the breakout zone with a throwback that formed a small falling wedge. GDX broke out of this wedge and the breakout is holding.

Note that falling wedges, whatever their size, are bullish continuation patterns in my book. They represent a correction after an advance and they typically retrace one to two thirds of the advance. The big wedge breakout in GDX signals a continuation of the June-August advance, while the small wedge breakout signals a continuation of the advance from late November to late December. Short-term, also notice how RSI(10) bounced off the 40-50 zone.

The Aggregate Bond ETF (AGG) and 20+ Yr Treasury Bond ETF (TLT) formed falling wedge patterns that extended into January. Even though both seriously underperformed from October to mid January, the structure of the price chart indicated that this was a correction. Notice that both held above their rising 200-day SMAs on the pullbacks. The wedge in AGG was quite flat, while the wedge in TLT retraced around 50%. Both broke out of these wedge patterns and these breakouts signal a continuation of the bigger uptrend. Thus, a move to new highs is expected until these breakouts are proven otherwise.  

Uptrend and short-term Shaky

MDY, IWM, IJR, XLI, BOTZ, IBB, XBI

The next group of ETFs are in uptrends overall and many broke out of short-term consolidation patterns last week. Despite the long-term uptrends, the short-term breakouts are looking a little shaky. I do not want to predict that these short-term breakouts will fail, but they should be watched closely. The first chart shows the Russell 2000 ETF (IWM) with a 15% advance since early October and a big breakout in early November. The ETF formed two flags and broke out of the most recent flag last week. This breakout is holding and remains the dominant short-term chart feature. The flag lows mark first support. A break here would reverse the short-term uptrend and argue for a corrective period.

The Industrials SPDR (XLI) broke out of a small pennant 13 days ago and this breakout is holding. The post breakout extension was not that strong and XLI fell 1.62% the last two days. This looks shaky on the short-term. Overall, XLI is holding above the breakout zone as broken resistance turns first support in the 79-80 area.

The Biotech ETF (IBB) broke out of a small flag and this breakout is largely holding, even though prices did not extend much after the breakout. Last week’s low established support at 118 and a break here would be short-term negative (failed flag).

Uptrend and Short Consolidation or Pullback

XLF, KRE, KBE

The Finance SPDR (XLF) hit a new high in mid December and then stalled the last five weeks. The Regional Bank ETF (KRE) and Bank SPDR (KBE) also hit new highs in mid December and then pulled back with falling wedges. These three are lagging the last five weeks, but still in long-term uptrends and still showing potential. Namely, a consolidation or falling wedge after a new high is deemed a bullish continuation pattern. Of course, these patterns do not work every time. However, the odds still favor a continuation of the bigger trend because the bigger uptrend is the dominant force. An XLF break above 31 and a KRE break above 58 would be bullish.

Choppy Uptrend

XRT

I am never sure where to put the Retail SPDR (XRT). It has been trending higher since August and remains above the flat 200-day, but it has yet to record a new high. In addition, the advance since September is rather choppy. Nevertheless, it is an advance and I will mark channel support at 44.50 for now.

Throwback after Breakout

REMX

The Strategic Metals ETF (REMX) broke out with a move above the September high and falling 200-day SMA. In general, a move above a rising 200-day is more positive than a move above a falling 200-day. Nevertheless, the breakout is there and this means REMX is in the early stages of a trend reversal. The breakout zone turns first support and the ETF fell back to this zone for the first test. Also notice that RSI(10) moved into the 40-50 zone. This is the first area to watch for a bounce. Careful with this one because volatility and risk are above average.

Failed Breakout/Reversal

XME

The Metals & Mining SPDR (XME) was the toast of the town in early December with a break above the 200-day and a Double Bottom breakout. Now it is just plain toast. The breakout held for a few weeks and then XME plunged below 27 with a double digit decline. The Double Bottom breakout failed and XME is back below the falling 200-day SMA. At best, the long-term trend is flat right now.

Downtrend

MJ, XLE, FCG, XES, XOP, XMLP, UUP

The energy-related ETFs are the worst performers here in 2020. The Oil & Gas Equipment & Services ETF (XES), Oil & Gas Exploration & Production ETF (XOP) and Natural Gas ETF (FCG) are down 10% or more here in January. All three peaked below their falling 200-day SMAs in late December and then moved sharply lower. The Energy SPDR (XLE) got above its falling 200-day SMA for a few days in late December, but fell back below and broke wedge support on Monday. A falling wedge is a bullish continuation pattern, while a rising wedge is a bearish continuation pattern. Thus, this break signals a continuation of the bigger downtrend and new lows are expected.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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