ETF Trends, Patterns and Setups – A Two Week Shift, Healthcare ETFs Remain Strong, SOXX and Retail Follow Thru

Arthur Hill, CMT
October 8, 2020

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Pattern, Trend and Setup Summary

There appears to be a shift in market dynamics over the last two weeks. Small-caps outperformed large-caps, the Regional Banks outperformed Software, High-Yield Bonds outperformed Treasury Bonds and Utilities divorced themselves from Treasury bonds with a big surge.

While correlation is not always causation, there is only one event that I can think of that has this kind of power. Yes, it is the elephant in the room: the election. With less than four weeks to go, the market appears to be pricing in a certain outcome. I will leave it to you to decide what that outcome might be. Alternatively, check out this podcast with Jesse Livermore.

At this point, I am not ready to elevate the finance sector and bank ETFs. There are still plenty of stronger ETFs out there right now and this should still be the focus. I will keep an eye on the Regional Bank ETF (KRE) and Bank SPDR (KBE) as they break out of falling wedges. The play here is either to wait for StochClose to exceed 60 or wait for an RSI dip into the oversold zone (30-50). Speaking of oversold zones, I will cover the three levels of oversold for RSI when revisiting the failed XME trade.

Elsewhere, we are seeing improvements in the market as the Russell 2000 ETF exceeds its early September high. The Semiconductor ETF and Retail SPDR are also showing upside leadership with strong follow through to their breakouts. Bonds remain the low light right now, but this makes sense because money is gravitating to riskier assets. Gold is showing early signs of strength as RSI bounces off a modestly oversold zone.

ETF Grouping and Ranking by Trends, Patterns and Setups

Consolidation, Breakout, Fresh New High

BOTZ, ITB, XBH, TAN

ETFs that consolidated, as opposed to pulling back, in September held up better. These same ETFs are leading here in October with consolidation breakouts and new highs. The Solar Energy ETF (TAN), of course, is leaving everyone behind with a race to the sun. Hope those wings are not waxed. The Robotics & Artificial Intelligence ETF (BOTZ), Home Construction ETF (ITB) and Homebuilders ETF (XHB) sport more conventional breakouts with modest follow through. Nevertheless, it is positive to see the two housing ETFs continue to lead with new highs.

Shallow Correction, Breakout, Follow Thru

XLY, XLV, XLB, IPAY, FINX, IHI

The next group of ETFs experienced relatively mild corrections in September and broke out in late September. These ETFs also recorded new highs in early September and are currently quite close to those highs in early October. The first chart shows XLV with a falling flag that actually came close to the rising 200-day. XLV broke out of this flag on 30-Sept and continued higher the last five days. The green line marks the breakout zone and the first level to watch for signs of failure. The second chart shows IHI with a similar setup.

The Mobile Payments ETF (IPAY) and FinTech ETF (FINX) also fit in this category. Their pullbacks were not deep at all as both held well above the 33% retracement line and rising 200-day SMA. Both broke out, stalled for a few days and jumped the last three days. Again, the green lines mark the breakout zones and the first levels to watch for breakout failures. Note that Visa (V) and MasterCard (MA), two big holdings in IPAY, are holding their 28-Sept gaps and breakouts.

3-4 Week Correction, Breakout, Follow Thru

SPY, QQQ, XLP, IGV SOXX, FDN, SKYY, HACK, XRT

ETFs in this next group also recorded new highs in early September and corrected into late September. These corrections were a little deeper than the ETFs in the group above, but the overall setups are basically the same. They have a new high, a 3-4 week correction, a breakout and some sort of follow through after the breakout. The breakout zones mark the first support levels to watch going forward. A strong breakout should hold and price should move higher after a breakout. Failure to hold the breakout zone would call for a reassessment. Within this group, note that the Semiconductor ETF (SOXX) and Retail SPDR (XRT) are very close to new highs. Again, leadership from semis and retail is a positive for the broader market because both industries are cyclical in nature.

3-4 Week Correction, Breakout, Stall

XLK, XLC

The Technology SPDR (XLK) and the Communication Services SPDR (XLC) also broke out in late September, but follow through has been limited as both stalled. The breakouts are holding and the cup remains half full right now. Lack of follow through shows some short-term relative weakness here in October. Again, watch the breakout zones to monitor the success or failure of these breakouts.

7-8 Wk Correction (Channel), Breakout, Throwback, Bounce

IBB, XBI

The Biotech ETF (IBB) and Biotech SPDR (XBI) peaked in mid July, corrected with falling channels into early September, tested their rising 200-day SMAs and broke out with big moves on 14-Sept. There were throwbacks to the breakout zones and these zones held as both bounced the last two weeks and exceeded their mid September highs. These two are on pace to exceed their July highs and record new highs.

Consolidation above 200-day, RSI bounce off 40-50 Zone

XLI

The Industrials SPDR (XLI) is on its own today. It held above the 200-day SMA and StochClose has been bullish since June. Technically, a consolidation is a continuation pattern. The bigger trend is up and this means the consolidation has a bullish bias, which means an upside resolution is more likely. RSI bounced off the 40-50 zone the last two weeks and XLI appears to be preparing for a run to new highs.

Wedge/Channel, Bounce Near 200-day, Leader since 25-Sept

RSP, MDY, IWM, IJR, IHF, HYG

The next group of ETFs were lagging on 24-Sept as they broke and/or tested their 200-day SMAs. These suddenly morphed into leaders with channel breakouts and market-leading advances the last two weeks. The Russell 2000 ETF (IWM) and S&P MidCap 400 SPDR (MDY) exceeded their early September highs, which is more than SPY and QQQ can say. IWM and MDY are still lagging year-to-date because they have yet to record 52-week highs for the current move, which began in late March.

I am calling the falling channel/wedge patterns “sloppy” because it is hard to draw a decent upper trendline. Nevertheless, there is a pullback to the 200-day and a breakout of some sort the last two weeks. The chart below shows IWM ultimately holding the 200-day and mid July breakout zone with a surge above 160. This is bullish and argues for a move to new highs because the bigger trend is up (price is above the 200-day and StochClose is bullish).

The next chart shows the High-Yield Bond ETF (HYG) following small-caps and mid-caps. HYG has yet to exceed its early September high, but it bounced near the 200-day and broke out of a falling channel/wedge thingy. Thus, it looks like a breakout ending correction and bigger trend resumption – as long as the 200-day holds. Junk bonds trade more like stocks than bonds. Note that TLT is down around 3% the last two weeks.

Triangle Breakout, Lagging Year-to-date, Leading 2 Weeks

XLU

The Utilities SPDR (XLU) also gets is own spot because it broke out of a triangle and above the 200-day SMA. XLU is currently challenging its June high. While this breakout is bullish, XLU is still not as strong as the ETFs shown above because it never exceeded its June high.

New High early August, Correction, Still Correcting

GLD, GDX, SLV

The Gold SPDR (GLD) is at a very interesting juncture because the long-term trend is up, the ETF is correcting and StochClose (125,5) dipped below 60. First, the price action. GLD hit a new high and corrected with a falling wedge that retraced 50-67% of the prior advance. Both the pattern and retracement are typical for corrections within bigger uptrends. A breakout at 183 would signal an end to the correction and resumption of the uptrend. There are early signs of strength as RSI dipped into the 30-40 zone to become modestly oversold and turned up.

What exactly does a StochClose move below 60 mean? StochClose values reflect the location of the close relative to the closing high-low range over the last 125 days. StochClose ranges from 0 to 100 and a value at 58.5 means price is just above the mid point of the 125-day range. StochClose was at 100 in July and this means prices have corrected (two steps forward and one step backward). A StochClose move above 60 would trigger a bullish signal.

Oversold Bounce off 200-day

XME, REMX

It is important to review and learn from past trades/setups, especially those that did not work out. Enter XME and REMX. Both were setting up nicely in mid September with bullish flags and RSI in the 40-50 zone, which denotes a mild oversold condition. Both broke out, but gave these breakouts back with sharp declines back to the 200-day SMAs. The flag trade/setup failed.

Note that one trader’s failed breakout is another’s mean-reversion setup. XME ended up bouncing off the 50-67 precent retracement zone and 200-day SMA as RSI bounced off the 30-40 zone. I would not have traded the flag breakout differently because it is one of my preferred setups, and the bigger trend is up. The failure is just an expense because we cannot win them all. Only a wider stop would have kept this trade alive. In testing, systems with tight stops are often less effective than systems with wide stops.

I would also like to elaborate on three oversold conditions: mildly oversold, modestly oversold and unhealthy oversold. RSI(14) in the 40-50 zone is mildly oversold and happens with shallow pullbacks. RSI in the 30-40 zone is modestly oversold and happens with deeper pullbacks. A pullback is deemed excessive and unhealthy when RSI moves below 30. Keep in mind that we are dealing with 14-day RSI. The ability to become oversold with a move below 30 shows strong downside momentum that is not usually associated with normal pullbacks (see 21-January).