ETF Trends, Patterns and Setups – Tech-related ETFs Lead as Reflation Trade Takes Back Seat

The election remains the topic du jour and will likely remain so for at least a day or two or three or four… Regardless of the outcome, the markets made statements with sizable moves over the last few days. As noted on Saturday, the S&P 500 SPDR is following the script from the 2016 election period (September to November). This points to a triangle breakout and continuation of the bigger uptrend.  

The charts are full of bullish consolidation patterns over the last one to two months. There are triangles, flat consolidations and falling channels. These patterns, when forming after a big advance, represent a correction and a bullish resolution is expected. Why? Because the path of least resistance is up when the bigger trends are up and the breadth models are bullish.

The reflation trade took the back seat on Wednesday as the Consumer Discretionary, Technology and Healthcare led the charge over the last three days. The Industrials, Materials and Finance sectors surged on Monday-Tuesday, but fell back on Wednesday as money moved into tech and healthcare related ETFs in a big way. These moves produced short-term reversals within bigger bullish continuation patterns for the tech-related ETFs and new highs in several healthcare-related ETFs.

In separate, and possibly related, price action, the 20+ Yr Treasury Bond ETF (TLT) surged, the Dollar fell and the Gold SPDR (GLD) looks poised for a breakout. TLT and GLD have falling wedge patterns and both are close to breakouts. The Dollar formed a triangle consolidation within a downtrend and this looks like a bearish continuation pattern.

ETF Grouping and Ranking by Trends, Patterns and Setups

New High and Leading


Healthcare-related ETFs took the lead over the last few days as the Healthcare SPDR (XLV), Biotech SPDR (XBI) and Healthcare Providers ETF (IHF) surged to 52-week highs. All three were in uptrends already and not that far from 52-week highs before the surge. This surge shows a clear post-election theme emerging. The first chart shows XLV hitting a new high in early September and then consolidating (blue lines) with a trading range into late October, just like SPY and QQQ. XLV surged off support Monday-Tuesday as the market started to price-in a certain election result. A new high and consolidation breakout are bullish, but we can also see that the upward trajectory (green lines) is not that steep. Nevertheless, up is up and this is an uptrend.

The next chart shows the Biotech SPDR (XBI) breaking out in mid September, hitting a new high in mid October, forming a small falling wedge and breaking out with a surge the last two days. RSI also bounced off the 40-50 zone. ETFs that held above 40 in late October showed relative strength (as opposed to ETFs that dipped below 40). This falling wedge is also typical for a short-term bullish continuation pattern. The new high makes XBI a clear leader.

New High in mid October, Pullback


I added the Clean Energy ETF (PBW) to the All Weather ChartList because the Solar Energy ETF (TAN) is a bit narrow in focus (only solar), is market-cap weighted and has above average volatility. The chart below shows PBW with a new high in mid October, a short falling flag pullback and a breakout on Monday. RSI also bounced from the 40-50 zone.

New High in mid October, Short-term Pullback and Bounce


The next group of ETFs are leading overall because they recorded new highs in October, which means they have higher highs from September to October. Most pulled back in the second half of October and reversed this short-term pullback with bounces the last few days.

The first chart shows the Semiconductor ETF (SOXX) with a string of higher highs and higher lows since April. The ETF pulled back from its most recent high and held above the September low as RSI dipped into the 30-50 zone (oversold zone).  SOXX broke out on Monday and this breakout signals a continuation of the uptrend. Thus, another new high is expected.

The Home Construction ETF (ITB) hit a new high in mid October, fell back to the September lows (support) and surged the last three days. RSI dipped quite deep with a move below 35, but surged out of the oversold zone this week.

Even though the Mobile Payments ETF (IPAY) dipped below its September lows and RSI dipped below 30, I included it in this group because it hit a new high in mid October and held the 200-day (StochClose is also bullish). Mastercard (MA), Visa (V) and Global Payments (GPN) are to blame for the deep dip. Square (SQ) and Paypal (PYPL) held their September lows. IPAY firmed above its 200-day and turned up the last three days. StochClose also move back above 60 for a bullish signal.

2-month Triangle Breakout, Bigger Uptrend


There are lots of charts with triangles extending over the last one to two months. Moreover, these triangles formed after big advances and are part of bigger uptrends. With the bigger trend up, the path of least resistance is up and these triangles represent bullish continuation patterns. ETFs with breakouts already, such as the Communication Services SPDR (XLC) are leading. The chart below shows XLC with a narrowing triangle, an RSI dip into the oversold zone, a gap on Wednesday and a breakout. XLC also exceeded its October high.

Falling Channel, Falling Flag and Breakouts


The Strategic Metals ETF (REMX) and DB Base Metals ETF (DBB), which may be positively correlated and related to strength in Asia, have breakouts working. DBB corrected in September (blue lines) and broke out in mid October. The breakout and the ATR trailing stop are holding, and DBB is close to another new high. Perhaps DBB belongs in group 1.

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

REMX surged off the 200-day in October, formed a flag into early November and broke out the last two days. The ETF broke out of a bigger falling channel as well and this projects a move to new highs. Also note that RSI bounced off the 40-50 zone.

Triangle Consolidation since mid Sept, Near Breakout


The Materials SPDR (XLB) and Metals & Mining SPDR (XME) also have triangles working, but did not break out as both fell on Wednesday. These two were part of the post-election rotation out of the reflation trade. Nevertheless, the chart shows XLB with a new high in early September, a triangle the last two months and two RSI dips into the oversold zone. The long-term trend is up and this is a bullish continuation pattern. Watch for a breakout.

2-Month Triangle Consolidation, Bigger Uptrend, ST Reversal


The S&P 500 SPDR (SPY) and Nasdaq 100 ETF (QQQ) hit new highs in early September, formed lower highs in mid October and then higher lows in late October. Connecting the dots, we can see triangles within bigger uptrends. These are bullish continuation patterns and the surge over the last three days reversed the downswing within the triangles. Also notice that RSI moved out of its oversold zone.

The short-term breakout in QQQ is clearer on the price chart. At this point, I would respect the gap and expect upside follow through, and a triangle breakout. At the risk of getting too granular with an undecided election out there, a close below Tuesday’s close would negate the gap and short-term breakout. Such a sudden and sharp reversal would call for a reassessment. Note that most of the tech-related ETFs are highly correlated to QQQ. Thus, what’s good/bad for QQQ is also good/bad for them.

2-Month Flat Consolidation, Bigger Uptrend, ST Reversal


Now we move from triangle consolidations to flat consolidations. Truth be told, I am splitting hairs trying to differentiate between the triangle, flat consolidation and falling channel. All three are bullish continuation patterns that represent a rest within the bigger uptrend. The Software ETF (IGV) and Cloud Computing ETF (SKYY) equaled their early September highs and fell to their September lows, more or less. RSI dipped into the oversold zone and both bounced with big moves on Tuesday-Wednesday. As with QQQ, Wednesday’s gap holds the first key going forward. I will consider an ATR Trailing Stop when/if this short-term reversal extends.

2-Month Falling Channel, Bigger Uptrend, ST Reversal


The next example shows this hair-splitting exercise with the Cyber Security ETF (HACK), which formed a lower high and lower low over the last two months. Regardless, a falling channel after a 76% advance is still a correction within a bigger uptrend (bullish continuation pattern). The surge off the support zone reversed the decline within the pattern.

Long Rising Channel since June, Short-term Surge


ETFs in this group sport rising channels with a series of higher highs and higher lows since June. These ETFs forged higher highs from September to October, but remain well short of 52-week highs. This makes them medium-term leaders and long-term laggards. The first chart shows IWM forging an island reversal the last seven days and RSI bouncing from the oversold zone. Note that financials (15.78%) feature big in IWM and this group is weighing on small-caps.

The next chart shows XLI bouncing Monday-Tuesday and declining on Wednesday. Defense-Aerospace stocks, which account for 18.25% of XLI, are weighing.

Ascending Triangle above 200-day


The three ETFs in this group have Ascending Triangle patterns working, which are bullish continuation patterns. The equal highs represent overhead supply (resistance), while the higher lows represent a rising demand line (support). A breakout confirms the pattern and argues for a continuation higher. All three are close to breakouts, but the High-Yield Bond ETF (HYG) led yesterday with the biggest move and a strong close. The surge in junk bonds means junk bond spreads narrowed and this is bullish for stocks (no signs of stress in the credit markets).

Flat Consolidation since June, Surge off Support


The Biotech ETF (IBB) led the market in percentage terms on Wednesday, but remains short of a breakout and even formed a lower high from July to October. Overall, the pattern at work looks like a long triangle after a 58% advance. This makes it a consolidation after an advance and a breakout would signal a continuation higher. This is all a bit moot because the XBI chart looks stronger overall.

Breakout of Long Triangle, Breakout Holding


The Utilities SPDR (XLU) gets a spot of its own because it broke out of a long triangle and distanced itself from XLF and XLRE, which remain stuck in never ending triangles. Even so, XLU does not exactly inspire. Like IWM and XLI, the price chart shows a slow and choppy rise over the last six months. XLU is not performing bad, but well below its 52-week high and certainly not a leader.

Falling Wedge Since August, Going for Breakout


Bonds surged on Wednesday as the market priced-in lower inflationary expectations (I think). Narratives aside, the 20+ Yr Treasury Bond ETF (TLT) and Aggregate Bond ETF (AGG) are going for falling wedge breakouts, and the Corporate Bond ETF (LQD) is leading with a break above the October high. AGG and LQD are poised to continue their bigger uptrends. TLT has been flat since March, but a wedge breakout would reverse the three month downtrend.

Falling Wedge Since August, No Breakout (yet)


I do not want to get into macro or intermarket narratives on Treasury bonds, gold, stocks and the Dollar. Narratives are interesting when drinking beers late into the night, but price action is what really matters and goes much better with coffee. The Gold SPDR (GLD) still has a bullish setup in the works and could be poised to follow TLT with a breakout. GLD retraced one half to two thirds of the prior advance with a falling wedge the last three months. GLD stopped falling in October and traded flat (less selling pressure). Now all we need is a little buying pressure and a breakout, and one of these breakouts will eventually stick.

The Dollar keeps swinging from bullish to bearish short-term, but the long-term trend is clearly down. DXY is well below the falling 200-day and hit a new low in early September. The index stabilized the last two months, which is when SPY peaked and moved into a consolidation. With SPY poised to break out, the Dollar could breakdown. A triangle of sorts is taking shape and a consolidation within a downtrend is a bearish continuation pattern.

Lagging, Downtrends and Off my Radar

The rest of the ETFs are off my radar because of long-term downtrends and underperformance.

Triangle since June, Short-term Reversal, Bounce

Consolidation within Downtrend, Below 200-day: MJ

Big Falling Wedge, Long-Term Laggard and Downtrend

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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