ETF Trends, Patterns and Setups – Bull Market, Recent Breakouts, Current Consolidations, Inflationary Pressures

The ChartBook and Ranking Tables were updated today. Links just above.

The bull market in stocks remains intact as we start 2021. The S&P 500 SPDR and Nasdaq 100 ETF finished the year at new closing highs, while the Russell 2000 ETF finished less than 2% from its December 23rd closing high, which was a 52-week high. For the year, IWM was up 18.34%, QQQ rose 47.57% and SPY gained 16.16% (sans dividends). Note the Silver ETF kept pace with QQQ in 2020.

Today’s update will cover the big three (SPY, QQQ, IWM) and then review some of the consolidation patterns that formed over the last few weeks. With further gains the last two days of the year, we are seeing breakouts in SOXX, XME, XLF and XLV. Several ETFs remain in consolidation patterns, which are considered bullish continuation patterns (RSP, XLP, XLI, XLB, ITB). We will finish with signs of inflation as the DB Agriculture ETF and Inflation-Protected Bond ETF hit new highs and the 20+ Yr Treasury Bond ETF sags. Also note that the Gold SPDR broke out at yearend and the Silver ETF remains strong.

SPY Holds its Breakout and Extends

The Russell 2000 ETF (IWM) led the way the last seven weeks (36 trading days) with the biggest gain since the gap open on November 9th: IWM is up 10.6%, QQQ is up 5.5% and SPY is up 3%. The first chart shows SPY breaking out of a triangle consolidation and slowly working its way higher since this breakout (+3% in 36 bars). The breakout zone turns into the first support area to watch should we see a pullback.

Small-caps and large-techs are leading the major index ETFs. IWM is leading because it sports the biggest gain and its first 52-week high was on November 9th. QQQ is leading because it recorded 52-week highs in June, July, August, September and December. There are no new signals or setups to report for IWM and QQQ as both simply work their way higher and hold the ATR Trailing Stop.

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

Yearend Breakouts

The next charts shows the Semiconductor ETF (SOXX) and Metals & Mining SPDR (XME) with pennant/flag breakouts over the last few days. SOXX led the market from April to December with a steady advance and a string of new highs. RSI hit its highest level (79) since April 2019 on December 8th and the ETF then worked off this overbought condition with a short stall (pennant). SOXX broke out on December 30th and this signals yet another continuation of the current uptrend. The green zone marks pennant support.

The next chart shows XME with similar characteristics. The ETF surged over 40%, hit new highs and RSI reached its highest level of the year. XME worked off its overbought condition with a falling flag and broke out of this pattern with a bounce the last two trading days. The green zone marks flag support.

Notes on Flags, Pennants and Short-term Consolidations

Short-term flags and pennants can be tricky to trade. As with all patterns, we can always go back and find text-book examples that worked perfectly: a breakout and continuation higher without looking back. The real world, of course, is different with plenty of failures and whipsaws. I do not have any stats, but these patterns are probably successful around 50% of the time (1000 trades). A pattern is deemed successful if there is a five to six ATR(22) move higher. This is ATR(22) x 5 added to the closing low just before the breakout. This would be around 411 for SOXX and 37 for XME.

The flag lows and a little buffer are the logical spots for the initial stop-loss. As you can see on the charts, these levels are not too far away and could easily trigger with a little volatility. The XME chart shows one such failure in mid September. Note however, that this failure did not result in lower prices as XME stabilized above the 200-day, formed another consolidation and broke out in early November. This breakout worked. Flags and pennants probably work when you consider 1000 trades: 50% profitable and with a 3 to 1 profit to loss ratio.

Finance and Healthcare Finish Year Strong

The Finance SPDR (XLF) and Healthcare SPDR (XLV) also broke out of short-term consolidation patterns. The flag in XLF is a little longer than those in SOXX and XME, while XLV formed a triangle consolidation and broke out.

Still Stuck in Consolidations

There are also some ETFs that have yet to break out and remain stuck in their consolidation patterns. Nevertheless, they are close to breakouts after a little pop last week. The first chart shows the S&P 500 EW ETF (RSP) with a very tight consolidation the last four weeks. The pink lines show the Bollinger Bands contracting to their narrowest since early September. A breakout here would be bullish for the broader market because RSP represents the “average stock” in the S&P 500.

ITB Struggles after Breakout

The Home Construction ETF (ITB) broke out of a triangle consolidation on December 17th and sputtered after the breakout. Overall, the chart still sports a bullish configuration with a strong advance, new high in mid October and a consolidation within an uptrend. ITB has gone nowhere since late August though and is underperforming the last four months. I am not going to read too much into this underperformance because the trend is up and the ETF is consolidating (as opposed to actually declining). The recent triangle breakout is still valid with the December lows marking first support.

Bonds, Agriculture, Inflation and Gold

The DB Agriculture ETF (DBA) did not end the year at a 52-week high, but it did end the year with a bang and an 11.3% gain the last two months. The trend is up and strong for this ETF and rising agriculture prices will ultimately translate into higher food prices.

The Inflation-Protected Bond ETF (TIP) has taken notice with a 2% gain the last two months and a 52-week high. The 20+ Yr Treasury Bond ETF (TLT), which is not protected from inflation, is barely positive over this timeframe (.12%) and below its 200-day SMA.

I realize that I am putting the Gold SPDR (GLD) into this mix, but frankly I have no idea what is driving gold. There are plenty of drivers out there and we never know which one is dominant (the Dollar, Bitcoin, inflation, deflation, rising debt levels, Fed buying US Treasury Bonds). I can, however, weigh in on the price chart and GLD is looking long-term bullish. The weekly chart shows GLD gaining 40% in 36 weeks and hitting a new high in August. The ETF then retraced around 50% of this advance with a falling channel. Both the retracement amount and the pattern are typical for corrections within a bigger uptrend. Also notice that RSI bounced off the 40-50 zone, a zone that acts as support in an uptrend. GLD surged 7% in December and broke out of the channel. The second chart shows the Silver ETF (SLV) breaking out three weeks ago. These breakouts ended the corrected periods and signaled a continuation of the bigger uptrends.

Thanks for tuning in and best wishes for 2021!

-Arthur Hill, CMT
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