ETF Trends, Patterns and Setups – Tech Still Leading, Small-caps Pull Back, Copper Fails to Hold Short-term Breakout, Lots of Bull Flags Out There (Premium)

After a nice run from early-mid October to early-mid November, trading conditions turned rough with choppy price action the last two weeks. The tech-related ETFs are still leading, but still quite extended short-term. Some old economy ETFs extended further on their medium-term breakouts and also remain a bit extended (industrials, housing, materials). The copper and metals related ETFs were setting up with short-term breakouts last week. Even though these breakouts failed as copper fell sharply the last three days, these ETFs are trading just above support and the bigger bullish patterns remain in play. Energy-related ETFs are setting up right now as oil pulls back from a new high.

Broad Market ETFs

The new highs continue with the S&P 500 SPDR (SPY), S&P 500 EW ETF (RSP), Nasdaq 100 EW ETF (QQEW) and S&P MidCap 400 SPDR (MDY) hitting new (closing) highs this week. Also note that the Technology SPDR (XLK) and Industrials SPDR (XLI) were the only two sectors to record new (closing) highs this week.

The Russell 2000 ETF (IWM) and S&P SmallCap 600 SPDR (IJR) fell back the last week or so, but hit new highs 8-10 days ago and remain above their breakout zones. Overall, the bull market remains in place and short-term overbought conditions are the only issue. Keep in mind that strong buying pressure is required to become short-term overbought and this is also a sign of strength.

As the S&P 500 SPDR (SPY) chart below shows, the setups and signals were in early-mid October when the ETF pulled back with a falling wedge. The October breakout occurred with a pop in Advance-Decline Percent (> +80%) and there was a Zweig Breadth Thrust on October 25th. SPY is currently up around 10% in six weeks so we could see some choppy trading after this big advance.

The Nasdaq 100 ETF (QQQ) chart is similar with a 13% surge in five weeks and a new high last week. QQQ is close to this high after a bounce the last five days. As with SPY, trading could become choppy after this initial surge. Notice how QQQ surged 15% from mid May to mid July and then worked its way higher into early September.

The Russell 2000 ETF (IWM) broke out in late October, hit a new high last week and fell back. The big breakout and new high are bullish so this decline is viewed as a pullback within a bigger uptrend. Traditionally, the breakout zone (~230) turns first support, however, IWM might not get there if buyers step in sooner. The seven day decline could evolve into a small falling wedge (pennant), which is a bullish continuation pattern.

Thanksgiving Week Holiday

The equity markets will be closed on Thanksgiving Day (November 25th) and close at 1PM ET on Black Friday (November 26th). Trading volume is a little lighter the first three days of the week because many take the week off or travel ahead of the big day.

Seasonal patterns for Thanksgiving week favor the bulls, slightly. According to Fund Strat (Tom Lee), the S&P 500 has risen 76% of the time on Thanksgiving week since 1995. In general, Wall Street would be happy to see the markets do nothing Thanksgiving week and then resume normal activities the week after. Me too.

Note that I will take off next week and there will not be any commentaries on TrendInvestorPro. I will, however, update the ETF Trends, Ranking and Signals tables on Thursday and Saturday.

New High in November, Leading, Short-term Extended


The Technology SPDR (XLK) continues to lead the market with a fresh new high this week and a 14% gain the last six weeks. Performance within the tech sector has turned a little mixed with the Internet ETF (FDN) and FinTech ETF (FINX) lagging (smaller gains), and the Mobile Payments ETF (IPAY) down around 8% the last six weeks. The chart shows XLK with a 14% advance in six weeks. Again, there is no setup on this chart and the ETF is short-term extended. This puts XLK and several other tech-related ETFs in the trend-monitoring phase. There is no setup currently. We could see choppy trading or even a pullback, but the path of least resistance is up.

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

The Finance SPDR (XLF) and the Insurance ETF (KIE) broke out to new highs in October and then consolidated with flags the last few weeks. Flags are short-term bullish continuation patterns that represent a rest after an advance. A breakout signals a continuation higher. The chart below shows XLF with a flag in mid September, a gap below the lower line and then a breakout. Yep, a little chaos is always possible, especially when the 10-yr Treasury Yield is all over the place. XLF remains in the flag and the Momentum Composite hit -2, which is just shy of the -3 required for a short-term oversold condition. Overall, XLF and KIE are setting up short-term bullish with these flags and I will watch for a short-term bullish catalyst.  

October Breakout, Short of New High, Bull Flag


We are seeing quite a few short-term consolidations because part of the market stalled the last one to two weeks. The consolidations formed pennants, small falling wedges, flat flags or falling flags. One to two weeks is a bit too short for my taste because the chance of a breakout and dip below the consolidation low are above average. Small patterns have small ranges and this makes them vulnerable to volatility whipsaws. Personally, I prefer a three to six week pullback, such as the ones seen from early September to early October. I would also prefer not to manage a flag-based trade Thanksgiving week. In any case, we have to work with what the market gives and there are currently short-term bullish continuation patterns out there.

The chart below shows the Healthcare SPDR (XLV) with the mid October breakout, follow through advance above 130 and pennant in November. A breakout at 135 would be short-term bullish and open the door to new highs for XLV.

You can learn more about exit strategies in this post,
which includes a video and charting options for everyone.

There are also some interest rate sensitive ETFs with bull flags/pennants working. These include the REITs and Utilities ETFs. The consensus suggests that rising rates are negative for Utilities and REITs. First, higher yielding bonds compete with high-yielding ETFs, which makes the ETFs less attractive. Second, rising rates translate into higher costs for debt servicing for Utilities. As far as correlations are concerned, REITs and Utilities are sometimes positively correlated to the 10-yr Treasury Yield and sometimes negatively correlated. Correlation fluctuate and change. This is why it is usually best to simply focus on the price charts. K.I.S.S.

The first chart shows the Residential REIT ETF (REZ) with the 65-day Correlation to the 10-yr Treasury Yield. REZ was positively correlated until May, negatively correlated until October and positively correlated here in November. On the price chart, REZ is in a clear uptrend with 52-week highs from July to November. Most recently REZ surged, formed a pennant and is making a breakout attempt.

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

We now get to ETFs that formed multi-month corrective patterns, broke out in October and hit new highs recently. These are the groups responsible for broadening participation and recent breakouts in mid-caps and small-caps. Some of these ETFs are up quite sharply the last seven to ten weeks. XLI, IFRA, XLB, ITB, XHB and XRT are up between 9 and 16 percent the last seven weeks. KRE and KBE were the first to break out and they are up 12.76% and 16.39% the last ten weeks, respectively. The breakouts from the multi-month corrections are medium-term bullish, but some of these are short-term extended. What else is new. They are all in buy-the-dip mode, which means pullbacks should be treated as opportunities, not threats.

The only setups working here are in the bank ETFs, which have bull flags taking shape. I will start with KRE because it is positively correlated to the 10-yr Treasury Yield. Check out this video for more on the relationship between the 10-yr Treasury Yield and KRE, as well as IWM and QQQJ. The chart shows 65-day Correlation in the bottom window and has been mostly positive for over a year. On the price chart, KRE broke out of a large triangle consolidation in early October and worked its way to new highs. Price stalled the last two weeks with a pennant taking shape and a breakout would argue for a continuation higher.

Three of the clean energy ETFs have breakouts of varying degrees working and consolidated after big moves in October. These are bullish consolidations designed to work off short-term overbought conditions.  The Global Clean Energy ETF (ICLN), Clean Edge Green Energy ETF (QCLN) and Solar Energy ETF (TAN) have yet to become short-term oversold though (Momentum Composite below -3). The short-term consolidations are these one to two week flags and pennants. Keep in mind that volatility is above average for these ETFs. The first chart shows ICLN breaking out of a long trading range and consolidating above this breakout zone in November. A small pennant formed and a breakout would signal a continuation higher.

You can learn more about falling wedge patterns in this video.

Oil continues to pull back and this is keeping the energy-related ETFs in check. There is currently a lot of jawboning on the SPR, strategic petroleum reserves. Check out Warren Pies on twitter for more details (@WarrenPies). Pies talks about it today because this report is issued on Thursdays and can cause volatility in the oil markets.

XLE, FCG and XOP hit new highs in October and then consolidated with flat flags. XOP is already breaking the flag lows and the other two will probably follow suit because oil is down this morning. The MLP ETF (AMLP) fell back with a falling flag and the Oil & Gas Equipment & Services ETF (XES) fell the hardest. XES is probably the most sensitive to oil prices and the one to watch. The chart below shows the ETF retracing around half of the August-October surge with a decline to the 54 area. The Momentum Composite dipped to -2 and is almost oversold. Thus, a setup could be in the making here.

The Momentum Composite aggregates signals in five momentum indicators. RSI(10) is oversold below 30 and overbought above 70. 20-day StochClose is oversold below 5 and overbought above 95. CCI Close (20) is oversold below -200 and overbought above +200. %B (20,2) is oversold below 0 and overbought above 1. Normalized ROC (10) is oversold below -3 and overbought above +3. Normalized ROC is the 10-day absolute price change divided by ATR(10). -3 means three of the five indicators are oversold and +3 means three of the five are overbought.

The Momentum Composite and StochClose are part of the TIP Indicator Edge Plugin for StockCharts ACP. Click here for more details.

The Communication Services SPDR (XLC) highlight the challenges with ETFs that have a rather strange mix of stocks. Meta Platforms (FB) is basically flat the last seven weeks, while Alphabet (GOOGL) and Netflix (NFLX) are up double digits. The latter two are keeping XLC afloat because the next seven are down between 3 and 17 precent. The PerfChart below shows performance for XLC and its top ten stocks since October 1st. Ouch.

On the price chart, XLC fell in September and then stalled the last seven weeks. This is actually surprising considering the PerfChart above. In any case, we are in the bull market and the long-term trend for XLC is up. This still favors an upside breakout and continuation of the bigger uptrend.

The Copper ETF (CPER), Copper Miners ETF (COPX) and DB Base Metals ETF (DBB) broke out of short-term pullback patterns last week, but fell sharply this week and negated the breakouts. All three still have bigger breakouts in play and are back in their support zones. CPER was hit the hardest and became short-term oversold (Momentum Composite at -3). The chart below shows the ETF with a channel breakout in mid October, throwback into early November and StochRSI pop last week. This is the setup and signal, but it did not work as CPER fell quite sharply the last three days. Another short-term setup is in the works and we can watch for a StochRSI pop above .80 to trigger this setup.

Here is link to a great commodity price table at Yahoo Finance. This includes stock index futures, bond futures and commodities.

There is no change in the Biotech ETF (IBB) and Biotech SPDR (XBI). IBB gapped down two weeks ago, fell below 155 last week and stalled the last five days. The overall trend is up this year (rising channel) and IBB remains near the 2/3 retracement area. Thus, the retracement is still normal for a pullback after a 24% advance. IBB is firming, but we have yet to see buying pressure return. A filling of the gap and trendline break would provide the first signals. A follow through break above the early November high would be bullish.

The Biotech SPDR (XBI) hit a multi-month low in August and then consolidated with a triangle. There was a short-term breakout in early November, but the ETF fell right back to the October lows. Normally, a triangle after a decline is a bearish continuation pattern and a break below the October lows would argue for further weakness. Thus, a big test is at hand.

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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