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ETF Trends, Patterns and Setups – Defensives Lead, Small-caps Chop, Silver Breakout and MJ Setup (Premium)

The market turned mixed the last six to eight weeks with defensive and high-yielding ETFs leading. ETFs related to Healthcare, Utilities and REITs hit new highs this week and produced market leading moves since early March.  

Growth oriented ETFs and the former high-flyers are still lagging as most remain below their mid March highs. This group includes the ARK ETFs, which did not really partake in the April move to new highs. Instead, they simply consolidated between their March highs and lows.

Small-caps are holding up, but going nowhere with a sideways correction, which is perhaps the most frustrating of corrections. Extended trading ranges chew up traders because short-term breakouts do not hold and oversold bounces materialize after breakout failures. After strong uptrends from late October to mid February, a corrective period is pretty normal and is just something we need to get through.

There are not a lot of setups this week. There were lots of setups and breakouts in March, and follow through was strong into April. Some of the laggards are setting up and these are highlighted towards the end of the report. In particular, I am seeing some bullish setups in the Alternative Harvest ETF (MJ) and Global Clean Energy ETF (ICLN). There are also fairly fresh breakouts in the Biotech ETF (IBB) and Silver ETF (SLV).

You can learn more about my chart strategy in this article [1] covering the different timeframes, chart settings, StochClose, RSI and StochRSI.

Leaders since early March, New Highs this Week

XLV, XLU, XLRE, IYR, REZ, IHF

ETFs in this first group are the runaway leaders over the last nine to ten weeks with gains ranging from 10 to 16 percent. There were clear setups in the Healthcare SPDR (XLV) and Healthcare Providers ETF (IHF) as they pulled back within their bigger uptrends. The setups in the Utilities SPDR (XLU), Real Estate SPDR (XLRE) and Residential REIT ETF (REZ) were not as clear. REITs broke out way back in January, corrected hard with a pullback in early March and then pow, right to the moon. The move in XLU started when it was below its 200-day and seriously lagging the market. You can’t catch them all.

The chart below shows XLV breaking out of a falling channel on the bar chart and then providing two short-term setups on the candlestick chart (flag and pennant). XLV is up 12% from the March low and RSI is pushing 80. It is time to manage the trade because XLV is in the trend-monitoring phase. This means we need to plan our exit strategy. Long-term trend followers can use StochClose signals and/or a break of the 200-day. Traders can consider a profit target for a portion and/or a trailing stop. The red dashed line shows the ATR Trailing Stop (2 ATR(22) values below the 21-April close).

You can learn more about ATR Trailing stops in this post [2],
which includes a video and charting option for everyone.

The next chart shows the Residential REIT ETF (REZ) with a breakout in early November, a falling wedge correction into January and a wedge breakout. The ETF is up over 20% from its January low. The red arrows on the bar chart show two pullbacks along the way with the most recent forming a bull flag on the candlestick chart. The red dashed line shows the ATR Trailing Stop for reference.

Strong Move since February Breakout, New Highs mid April

XLI, XLF, XLC, SLX

The next chart shows the Industrials SPDR (XLI) breaking out of a multi-month consolidation in late February and continuing higher with a steady zigzag. Again, there is nothing to do here except manage the trade and wait for the next setup. The red dashed line shows the ATR Trailing Stop (2 x ATR(22)) and the black line shows a wider version (3 x ATR(22)). I am more of the mind to tighten stops at this stage and then wait for the next setups.

Late March Breakout, Surge, New High this Week

IHI

The Medical Devices ETF (IHI) broke out a little later than XLV and IHF, but made up for its tardiness with a sharp move to new highs. IHI is up some 12% from its March low and hit a new high this week. The ATR Trailing Stop is shown for reference.

Early-Mid March Breakout, Strong Advance to New Highs

SPY, QQQ, XLK, XLY, XLP, XLB, ITB, PBJ

ETFs in this next group went through modest corrections earlier in the year and then broke out in early March. They all continued higher after their breakouts and hit new highs here in early April. These ETFs are also quite extended with 33 day gains ranging from 10.8% (SPY) to 21.26% (ITB). Again, there is nothing to do here except manage the trade or wait for the next setup. The Consumer Staples SPDR (XLP), Food & Beverage ETF (PBJ) and Materials SPDR (XLB) hit new highs on Wednesday and are leading within the group.

The first chart shows SPY with a 29% gain since the late October low and a 12% gain off the early March low. There were two short-term setups since March: the flag on the bar chart and the smaller flag on the candlestick chart. The three dashed lines show three ATR Trailing Stops: the first is 1 ATR(22) value below the highest close (Friday) and the other two are 2 ATR(22) values (red) and 3 ATR(22) values (black) below. The tightest triggered on Tuesday.

The next chart shows QQQ triggering the ATR Trailing Stop (1 x ATR(22)) in the candlestick window and holding just above the wider stop on the bar chart. Looking at the two bullish continuation patterns on the bar chart, notice that the Sep-Oct pattern is much bigger (9 weeks) and the post-breakout advance extended 11 weeks or so. The channel correction lasted just three weeks and the post breakout advance is currently six weeks. There is no rule governing these time ratios, but the longer the pattern is the longer the expected move. A breakout from a three week pattern would not be expected to last as long as a breakout from a 9 week pattern.

The Consumer Staples SPDR (XLP) is another current leader that was lagging the market less than two months ago. The blue box shows XLP within a large trading range for some nine months. The ETF was over 7% below its prior high and below its 200-day in early March and then suddenly went on a tear. I missed the move, but there is no sense chasing at this stage.

The next chart shows the Home Construction ETF (ITB) with a 25% gain off the March low. The blue dashed line marks the ATR Trailing Stop (1 x ATR(22)) and this stop was hit on Tuesday. The trend is still up and strong, and this stop is for traders or those looking to take some money off the table. The wider trailing stop has not triggered because the close was not below 69.90.

You can learn more the StochClose indicator and strategies in this post. [3]

April Breakout, New High this Week

PHO

Speaking of longer patterns, the Water Resources ETF (PHO) consolidated for 11 weeks and broke out on April 1st, no fooling. The post breakout move is currently three weeks old and should have further to extend. The breakout zone turns first support to watch should we get a throwback.

April Breakout, Extension Higher

COPX, CPER, DBB,  DBA, GLD, SLV

Note that I covered the Copper Miners ETF (COPX), Copper ETF (CPER) and DB Base Metals ETF (DBB) on Tuesday (here). [4] The DB Agriculture ETF (DBA) fits in the commodity group and this ETF also broke out of a corrective pattern in early April. Follow through was strong as DBA hit new highs this week. New highs are bullish and big moves make for good headlines, but the setups and breakouts occur first and this is where we should focus.

The Gold SPDR (GLD) is getting a bit of an upgrade this week because it broke its mid March high and led the market the last four weeks. It is still well below its 200-day, but the structure of the long-term chart shows some promise. The upper right window shows GLD retracing 2/3 of the prior advance and firming near the spring 2020 lows. The bar chart shows a double bottom and breakout, as well as the bullish failure swing in RSI. The Heikin-Ashi Candles show a pennant, breakout and follow through.

The Silver ETF (SLV) also sports an interesting long-term setup. The upper right window shows a massive surge and a big triangle consolidation, which is a big bullish continuation pattern. The bar chart shows price action within the triangle and we can see a wedge that retraced 2/3 of the prior advance. SLV broke out of this wedge and moved back above its 200-day SMA in early April.

RSI Bullish Failure Swing, Short-term Price Breakout

IBB

The Biotech ETF (IBB) is nowhere close to a new high, but it is above its rising 200-day SMA and the ETF recently broke out short-term. The decline back to the 200-day was viewed as a correction within the bigger uptrend and the ETF found support near the prior breakout zone as it retraced around 2/3 of the prior advance. Trading turned quite choppy, but IBB held the support zone and 200-day. A bullish failure swing formed in RSI and RSI broke above the mid March highs as price broke above the early April highs this week. IBB is showing promise here and the sector is strong.

Wedge Correction within bigger Uptrend

MJ, YOLO

If I am going to pick a bottom in something, it needs to be something with a long-term bullish theme, such as marijuana or clean energy. The next chart shows the Alternative Harvest ETF (MJ) with a massive advance and a Reddit fueled parabolic move in February. The ETF has since corrected with a triangle that retraced one half to two thirds of the prior. I view this triangle as a correction within an uptrend or a bullish continuation pattern. As such, I am watching the swings within the triangle for the early jump. The candlestick chart shows the current downswing and a breakout at 21.8 would provide the first trigger.

Failed Short-term Breakout, Medium-term Consolidation

IWM, IJR

The next chart shows the Russell 2000 ETF (IWM) hitting a new high in mid March and then consolidating with a narrowing range (triangle). This pattern could also be a Diamond or Head-and-Shoulders, but I am only interested in the right side. Triangles are typically bullish continuation patterns that represent a rest within the bigger uptrend. Technically, a breakout (227) would be bullish and signal a continuation higher.

The IWM chart also shows how corrective periods can be frustrating. The blue dashed lines on the bar chart show a flag, breakout and sharp decline back to the early March lows (fail). The candlestick chart shows a pennant, breakout and sharp decline below support on Tuesday (fail). And then the ETF surged on Wednesday with an oversold bounce. Traders are getting chewed up within this trading range and IWM is best avoided. As noted on Thursday (here), [5] small-cap breadth is seriously lagging large-cap breadth and this also argues for avoiding small-caps.

Broke Mid March High, Holding Above or Testing Breakout

IGV, FDN, SKYY, CIBR, FAN, HERO

ETFs in this next group experienced deep declines in late February and early March. These declines retraced more than half of the prior advance, but held above the rising 200-day SMAs. These ETFs bounced in April and broke above their mid March highs and are holding above these breakouts for now. They did not, however, record 52-week highs here in April and are not as strong as ETFs that did. The breakout zones (mid March highs) turn first support to watch should we get a throwback. These charts are not ideal and the setups are not that great, especially with the odds of a corrective period increasing for the broader market.  

The Wind Energy ETF (FAN) returned to its breakout zone with a falling flag and a breakout would be bullish.  

Consolidating above Rising 200-day ICLN

The Global Clean Energy ETF (ICLN) gets a spot above the other clean energy ETFs because it is holding up a little better. Note that the Clean Energy ETF (PBW) and Solar Energy ETF (TAN) broke below their March lows. The upper right chart shows ICLN surging some 300% and then retracing 33-50% of this advance with a decline back to the rising 200-day. On the bar chart, the ETF consolidated with a triangle, which is typically a bearish continuation pattern. A break below 22 would argue for another leg lower. For now, the 200-day is holding and RSI formed a bullish failure swing. On the candlestick chart, we can see that ICLN popped and then retraced 67% with the pullback. A break above 24 would provide the early signal for a bigger breakout on the bar chart.

Below mid March High (lagging), Failed Short-term Breakout

IWO, QQQJ

The Russell 2000 Growth ETF (IWO) and Nasdaq 100 Next Gen ETF (QQQJ) looked poised for further gains last week and then fell sharply on Monday-Tuesday. The overall patterns remain the same on the bar chart: consolidation within uptrend and a break above the April highs would be bullish. Short-term, there were small pennants and breakouts last week, but these failed with the sharp decline on Monday-Tuesday. These ETFs, along with IWM and other laggards, are probably part of the frustration trade so tread carefully.

Broke March Lows, Lagging

XLE, XES, XOP, FCG

Oil and energy-related ETFs are off my radar because I think spot crude is in a secular downtrend since June 2008 and hitting long-term resistance from the 2019 highs. The chart below shows the Oil & Gas Equipment & Services ETF (XES) falling sharply in mid March, stabilizing for a few weeks and breaking the March lows. The candlestick chart shows a Descending Triangle and breakdown. I realize that XES is coming into a potential reversal zone marked by the 50% retracement, rising 200-day and prior lows, but I am just not interested in oil-related names right now.

Others

Consolidating between March High and Low (no breakout and lagging)
ARKF, ARKG, ARKK, ARKQ, ARKW, PRNT, IZRL

Broke March Lows, Testing 200-day (still trending lower)
PBW, TAN, XBI

Thanks for tuning in and have a great day!