ETF Trends, Patterns and Setups – Three Tech ETFs Set Up, Clean Energy ETFs Pull Back after Breakouts, Banks Fall with 10yr Yield (Premium)

I normally publish on Thursdays, but we saw some extraordinary price action the last few days so I will publish on Tuesday this week. I will also update some of the other ETFs on Wednesday (XLI, IFRA, XLB…). Stocks were clobbered on Black Friday and rebounded somewhat on Monday. QQQ recovered all of its Black Friday losses and remains the leader. IWM did the old pop and drop on Monday and remains near the Black Friday close.

Even though trading volume was below average on Friday and it was a pseudo holiday, we cannot ignore the price action (down gaps and outsized declines). At the very least, this kind of price action has a destabilizing effect and it make take a few days for the market to find its footing. The performance discrepancy between small-caps and large-caps did not start on Friday. It was simply amplified. Small-caps peaked on November 8th and were already in pullback mode. This means the market was bifurcated before Friday and remains bifurcated. Not all boats are rising.

Go Big or Stay Home

I used to have a Friday night poker group and this was the motto when someone needed to call a big bet. Go big or fold. For the stock market, large-caps are the name of the game and technology is still the best performing sector overall. Go large cap or stay home. The S&P MidCap 400 SPDR (MDY) peaked on November 8th and is around 5% from its 52-week high and the Russell 2000 ETF (IWM) is around 9% from its 8-Nov high. Small-caps were the talk of the town just four weeks ago as IWM broke out of a long consolidation and hit a new high. Flash forward and small-caps are still the talk of the town, but for other reasons.

The chart below shows IWM with two large triangles since March (blue lines), two breakouts and two failed breakouts (yellow ovals). A throwback after a breakout and big advance is fine and IWM should have held the 230 area. It did not. There is plenty of blame to go around (news), but the price chart shows a clear failure. On the positive side, IWM is back in the trading range that has held since March and short-term oversold as the Momentum Composite dipped to -5 and -4. Watch for a break above 230 and/or a StochRSI pop to put the bulls back in play.

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.

QQQ, XLK and SOXX Lead the Way

Large-cap tech stocks remain strong overall with QQQ and XLK still trading near their highs.  Short-term, these two stalwarts recovered all of their Black Friday losses on Monday. There are no setups right now as both remain in the trend-monitoring phase. The first chart shows QQQ hitting a new intraday high last week Monday and then dipping the next three days (Tuesday, Wednesday, Black Friday). QQQ recovered the Black Friday loss with a move back above 399 on Monday. Without a setup on the chart or oversold conditions, the best we can do is guestimate the next support/reversal zone. Broken resistance and the 50% retracement mark my guess in the 380 area (blue shading).

Outside of a few mega caps (AAPL, MSFT, GOOGL), the Semiconductor ETF (SOXX) is the leading group within the technology sector. And, as with QQQ and XLK, I do not see a setup and SOXX is in the trend-monitoring phase. You are either riding the trend or waiting for the next setup. SOXX was up some 23% in six weeks and is very close to last week’s high after a big move on Monday. This is one of the hottest groups in the market and will likely attract buying interest on a pullback, especially as we move into yearend. Guesstimating the next support level is a challenge, but I would watch the 500 area should we see a pullback.

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

In contrast to the three above, there are setups brewing in three tech-related ETFs: the Cloud Computing ETF (SKYY), Cybersecurity ETF (CIBR) and Software ETF (IGV). The first chart shows IGV with the third harami setup since May. A harami is a short-term two-candlestick pattern that represents indecision that could foreshadow a reversal. The body of the second candlestick is inside the body of the first. The May harami formed at support, the October harami formed after a 33-50% retracement of the prior advance and the current harami formed after a 50-67% retracement. IGV surged on Monday and this confirms the harami. Also notice that there was an RSI “W” breakout, which is also short-term bullish. We have yet to see a StochRSI pop.

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

The next chart shows the Cybersecurity ETF (CIBR) retracing 50% of the October-November advance and forming a bullish engulfing on Tuesday-Wednesday last week. CIBR did not dip below these lows on Black Friday and bounced on Monday. This bounce, however, is not quite enough to confirm the harami and trigger a short-term breakout.

It is also worth noting that these three ETFs were hit quite hard on November 22nd, the Monday before Thanksgiving. They were also hit hard in early May and late September, scene of the last reversals. No two reversals look the same, but the current setups do not have a clear short-term resistance level or pattern at work. Wednesday’s high is just a one-day resistance level. Notice how CIBR broke a resistance level that was established over seven trading days (May) and broke flag resistance with a gap in early October. Given the recent uptick in market volatility, we could see another dip below last week’s low. Overall, I still view the November declines as pullbacks within bigger uptrends. This means they are viewed more as opportunities, than threats. We just don’t know how long the pullback will extend or what shape it will take.

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

The Lithium Battery Tech ETF (LIT), Strategic Metals ETF (REMX) and Global Carbon ETF (KRBN) remain leaders overall and close to new highs. KRBN and REMX do not have setups, but LIT did form a bull flag. The first chart shows KRBN breaking out of a small wedge in late October and hitting a new high on Monday. Not many ETFs hit new highs this week.

The Strategic Metals ETF (REMX) also hit a new high on Monday as it followed through on a small wedge breakout (23-Nov).

The Lithium Battery Tech ETF (LIT) has a small bull flag working. After surging 21% in five weeks, the ETF stalled to digest these gains with a small consolidation. A consolidation after a sharp advance is typically a bullish continuation pattern and a breakout would be bullish. LIT bounced on Monday with a 2.2% gain and this is a start. Be careful here because volatility is high. LIT pretty much doubled from the March low to the November high.

The Uranium ETF (URA) is another volatile ETFs and is also has a bullish pattern at work (falling flag after a new high). URA was up 84% from mid August to early November so we can expect a wild ride on this one. The falling flag retraced almost half of the prior advance and there is lots of support in the 23-24 area. Flag resistance is set at 28 and a breakout here would reverse the short-term fall.

The Healthcare SPDR (XLV) and Utilities SPDR (XLU) did not hit new highs in November, but they are holding up well the last few days and have short-term bullish patterns at work. The first chart shows the Utilities SPDR (XLU) with a choppy uptrend since the March breakout. XLU bounced in October, formed a bull flag into November and broke flag resistance. XLU is the opposite of URA and LIT when it comes to volatility.

The Healthcare SPDR (XLV) bounced in October and then formed a falling wedge into November. This is a short-term bullish continuation pattern and a break above the Black Friday high would be bullish.

The clean energy ETFs led the market in October and then took a breather in November with pullbacks. The Clean Edge Green Energy ETF (QCLN) is the closest to a 52-week high, which makes it the strongest of the three. Tesla accounts for 10.4% and NIO is 6.9%. There are also sizable positions stocks related to lithium (ALB), solar (ENPH, SEDG, FSLR), semiconductors (ON, WOLF) and batteries (PLUG, CHPT). On the price chart, QCLN broke out of a long triangle consolidation with a huge move in October. The stock stalled the last few weeks with a falling flag like consolidation and this is viewed as a short-term bullish continuation pattern. Watch for either a StochRSI pop above .80 (momentum thrust) or a flag breakout.

The Global Clean Energy ETF (ICLN) and Solar Energy ETF (TAN) also have breakouts in October, but they are quite far from their 52-week highs and not as strong as QLCN overall. ICLN broke out and then corrected with a small falling wedge. Watch for a StochRSI pop or a wedge breakout to signal an end to the pullback and a resumption of the breakout.

TAN broke out of a large wedge in October, formed a small pennant in early November, broke out and then fell back. This is the challenge with small flags and pennants on ETFs with above average volatility. It does not take much to push prices below the flag/pennant low and negate the breakout. TAN became short-term oversold last Friday as the Momentum Composite dipped to -3. I am now watching for some sort of short-term bullish catalyst, such as a StochRSI pop above .80.

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

I wrote about strong positive correlation between the 10-yr Treasury Yield and relative performance for banks on November 12th. There is also a strong positive correlation between the 10-yr Treasury Yield and relative performance for small-caps. This means small-caps and banks outperform when the 10-yr Treasury Yield is rising and underperform when it is falling. Well, the 10-yr Treasury Yield is on the verge of a breakdown and this would be negative for small-caps and banks. A decline in the 10-yr Treasury Yield means Treasury bonds advanced and money moved into safe haven assets, inflationary pressures be damned. The chart shows the 10-yr Treasury Yield plunging on Black Friday, breaking the channel line and closing below the 200-day for the second time this month. I set support at 1.40 and a break here would fully reverse the upswing and argue for lower yields (higher bond prices).

The next chart shows the Regional Bank ETF (KRE) with a triangle breakout in late September and new highs in November. The trend is up and a pullback would still be viewed as a correction within a bigger uptrend. Also note that the Momentum Composite dipped to -3 (oversold). A possible setup is in the making, but I would pass on this should the 10-yr Treasury Yield continue lower. At this point, I am more inclined to let the dust settle and wait for KRE to find its footing after the breakaway gap down.

The Gold SPDR (GLD) has gone nowhere since mid June, and is yet all over the place. The ETF broke out of a large triangle with a big surge in early November, but fell back into the consolidation with a sharp decline. Welcome to the wacky world of gold and macro movers. Clear setups and trends are often the exception when it comes to gold. One could argue either way for the long-term trend. Short-term, however, there is a bullish setup because the decline retraced 2/3 of the prior surge and GLD formed the last four days. Watch for a StochRSI pop and/or break back above the 200-day (169). Risk would be on a break below 166.

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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