ETF Trends, Patterns and Setups – Key ETFs Fail to Confirm New Highs, Trailing Stops with ATR, Banks Still Lagging

Some discrepancies are starting to build in the stock market. We witnessed a bullish breadth thrust last week because mid-caps and small-caps led from 24-Sept to 12-October. The Russell 2000 ETF exceeded its September high and produced a market leading gain during this time period.

The S&P 500 SPDR and Nasdaq 100 ETF broke out of falling wedge patterns during this period and also moved higher. However, they did not exceed their early September highs. Thus, we have a non-confirmation because large-caps and several tech-related ETFs did not confirm the new highs. Also note that XLY, XLI and XLU were the only two sectors that exceeded their early September highs. The other eight, including XLK, XLC and XLF, fell short and did not record higher highs.

Short-term outperformance in mid-caps, small-caps and banks was impressive, but this also translates into short-term underperformance for large-caps and large-cap techs. With large-caps dominating the market, I would rather see large-caps leading, not lagging. Also note that small-caps and banks are still lagging year-to-date.

There were lots of pullbacks into September and breakouts in late September. Most of the ETFs in the first groups fit this pattern: new high, pullback, breakout and follow through. This means they are in the trend-monitoring phase. As such, I added some ATR-based trailing stops to these charts. Details below.

ETF Grouping and Ranking by Trends, Patterns and Setups

Shallow Pullback, Breakout and New High this Week


ETFs in this first group are leading because their September pullbacks were shallow, they broke out and recorded new highs this week. Led by strength in retail and housing, the Consumer Discretionary SPDR (XLY) recorded a new high in early September, pulled back with a falling flag for a few weeks and broke out in late September. This was a pretty shallow pullback and it did not take much to notch another new high. The green zone marks the breakout area and short-term support going forward. The second chart shows XRT with similar characteristics.

The next chart shows the Home Construction ETF (ITB) with a pennant breakout and new high. Even though follow through after the pennant breakout was not that strong, a new high is a new high (bullish). I could mark first support using the pennant breakout, but this does not offer much wiggle room for a little noise so I will mark support with the pennant lows.

RSI Above 85 this Week, Small Bull Flag


The Solar Energy ETF (TAN) is the best performing ETF in this chart group with a 45% gain since early September (based on closing prices). RSI exceeded 85 this week and hit its highest level since March 2015. RSI at 85 reflects a seriously extended condition so be careful with this one. A falling flag is possible over the last five days and this mini pullback could be similar to the late July mini pennant.

Sept Pullback, Breakout, Follow Thru, New High this Week


The next group of ETFs are leading as well because they also recorded new highs this week. These ETFs hit new highs in early September, pulled back into mid September, broke out in late September and recorded new highs this week. The long-term trends were up throughout September and the breakouts reversed the short-term downtrends. These ETFs are in the trend monitoring stage. Long-term players can watch rising 200-day SMAs and the StochClose for trend signals.

Short-term players may consider trailing stops for these breakouts. The chart for IGV shows a trailing stop based on ATR(22). The stop is 2 ATR values below the highest close since the 28-Sept breakout, which was 13 days ago. It is different than a Chandelier Exit because it only considers price data since the breakout. The lookback period extends as the breakout holds and new price bars are added. After Thursday’s close, this would be the highest 14-day close less ATR(22) x 2. Also notice that this stop jibes with the breakout zone (green).  A close below 310 would negate the breakout. The next chart shows the Semiconductor ETF (SOXX) with similar properties.

Sorry, this indicator is not available at StockCharts, but you can consider using Parabolic SAR as an alternative. This ATR Trailing Stop is available on Optuma

New High Sept, Pullback, Breakout, Did not Exceed Sept High


ETFs in the next group are cause for some concern because they did not exceed their September highs. Some came close (SKYY) and some did not (XLC). The inability to exceed the September high creates a non-confirmation of sorts. The ETFs in the first groups exceeded their September highs and these ETFs did not confirm with higher highs. They are showing a little less strength on the price charts. They are still in uptrends, but non-confirmations from SPY, QQQ and XLK are cause for concern, concern that we may be entering a trading range.

The chart above shows SPY with a falling wedge breakout on 28-Sept and follow through that stopped short of its September high. The blue squiggly line is the ATR trailing stop (highest close since 28-Sept less ATR(22) x 3). The green zone marks the breakout zone or first support based on price. A close below 330 would negate the breakout and argue for a deeper correction, perhaps to the 300-310 area. The next chart shows QQQ with similar characteristics.

Aug-Sept Correction, Breakout, Strong Follow Through


The Biotech ETF (IBB) and Biotech SPDR (XBI) corrected in Aug-Sept and broke out with big moves on 14-Sept. Both fell back after the breakout, but held their gap zones and moved higher the last few weeks. IBB fell just short of its mid July high, while XBI exceeded it and recorded a new high. IBB is dominated by large-caps with the top five accounting for 33% of the ETF (GILD, AMGN, VRTX, REGN, ILMN). XBI is a much broader ETF with more component stocks and relatively equal weightings. Both are in long-term uptrends as long as the rising 200-day SMAs and September lows hold.

Biotechs have above average volatility and this means more wiggle room is required for trailing stops based on pattern breakouts. The ATR Trailing Stop is set 3 ATR values below the closing high since the breakout (14-Sept). Chartists using Parabolic SAR can allow more wiggle room by changing the default settings to (.01, .10). There are lots of whipsaws when using the default settings (.02, .20).

Rising Channel, Late Sept Breakout, New High this Week


Note that these trailing stops are short-term in nature and only for trades based on the wedge/flag breakouts. The long-term trends are still up and a little noise, which seems to be in abundance these days, could easily trigger these stops. The next chart shows XLV with a breakout and ATR Trailing Stop at 106.14. While a move below 106 would trigger the stop, it would not reverse the longer-term uptrend. Notice the rising channel since late April with higher highs and higher lows. A close below 100 would break this channel.

Pullback to 200-day, Breakout, Exceeded Sept High


ETFs in this next group led the market for three weeks with big advances from 24-Sept to 12-Oct. They exceeded their summer highs (sans IJR*), but remain well below their 52-week highs. Thus, they had 15 days of fame. As noted before, I have no problem missing this big move because it started from a position of relative weakness (below the 200-day). There is no sense chasing such a move so I will let the market come to me. Perhaps a 50% retracement of this advance will provide a setup. I will cross that bridge when and if it gets here. For now, there is nothing to do here but observe. The chart below shows IWM with a rising channel since June as it zigzags higher. The September low and 200-day mark key support.

The High-Yield Bond ETF (HYG) is acting just like a small-cap index: going nowhere with a slight upward drift. HYG exceeded 85 way back on June 5th and moved back below this level on Wednesday. It has nothing to show the last 4+ months. HYG is above its flat 200-day SMA and does have a channel breakout of sorts working. The recent lows and 200-day mark support at 82. A breakdown here would be quite negative because it would also suggest a widening of junk bond yield spreads.

Long Consolidation, Breakout, Exceeded Summer Highs


The Utilities SPDR (XLU) is a bit like IWM because the breakout is short-term bullish and the ETF is quite extended after a double digit advance. Both are also well below their 52-week highs. There is a clear triangle breakout in play and XLU finally got well above the 200-day SMA. The bigger picture is bullish. Short-term, the breakout zone and 200-day SMA mark first support in the 60-61 area. This is the place to watch for a possible bounce should XLU pull back.

Correcting Since early August


The precious metals and bond ETFs remain in corrective patterns since early August. The Corporate Bond ETF (LQD) is perhaps the strongest of this group because it broke out of a falling wedge and exceed its late September highs. RSI also broke out of its oversold zone.

The 20+ Yr Treasury Bond ETF (TLT) is at a moment of truth as it bounces off the rising 200-day. StochClose turned bearish last week with a move below 40 and RSI dipped to 30.08 (barely holding the 30 level). Overall, TLT is locked in a trading range since early March and a downtrend since early August. The wedge is still falling and a breakout at 166 is needed to reverse this immediate downtrend.

The Gold SPDR (GLD) appeared to breakout of a falling wedge on Friday, but fell back the last three days and got cold feet. The long-term trend is up and the wedge retracement is normal for a correction within a bigger uptrend. Thus, a breakout and continuation higher are still expected. StochClose also dipped below 60 and a cross back above 60 would trigger a bullish signal. In the meantime, there could be more noise or even a swing lower. The dashed lines show a smaller rising wedge and a break below last week’s low would be negative, especially if the Dollar breaks above last week’s high.

Triangle Consolidation since June, did not Exceed June High


ETFs in this next group are still lagging on the six to nine month timeframes. Their 200-day SMAs are falling and they did not clear their summer highs. The chart below shows the Finance SPDR (XLF) with a market leading advance from 25-Sept to 12-Oct and a move above the 200-day, which lasted just four days. XLF did not exceed the early September high and reversed this four week upswing with a decline the last two days. Even though StochClose is bullish, XLF is not a leader and largely off my radar.

Wedge Breakout, Below 200-day, Did not Exceed Aug High


The Bank SPDR (KBE) and Regional Bank ETF (KRE) also led the market with big moves in late September and early October, but they are still lagging on the six to nine month timeframes. What’s more important? Leading for two to three weeks or lagging for six to nine months? I think you know the answer. The chart shows KRE surging to its falling 200-day with a wedge breakout. This surge and breakout, however, started from a position of weakness. KRE was below the July low and seriously lagging when this started. Furthermore, KRE did not exceed the summer highs.

Long-term Downtrend, Higher Low, Short-term Breakout


The Alternative Harvest ETF (MJ) is in a long-term downtrend, but the ETF managed to hold above its March low and surge some 15%. The move broke short-term resistance and reversed the downtrend that was in place since late July. This price surge was news related and perhaps a mini flag formed with the pullback the last two days. A break above 11.70 would argue for more short-term strength.

Well below Falling 200-day


Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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