ETF Trends, Patterns and Setups – A Divided Market Since May, Tech and Healthcare Extended, Others Still Correcting (Premium)

The rodeo is in town as the S&P 500 SPDR fell 2.25% on Friday-Monday and surged 2.25% on Tuesday-Wednesday. Despite the same percentage moves, a 2.25% advance is not enough to completely erase a 2.25% decline and SPY remains below last Thursday’s close. The gray lines on the chart below show when a two-day 2% advance follows a two-day 2% decline. This is the fourth time since late January so the sequence is not that unusual. Basically, SPY continues to grind higher with buyers stepping in on each dip to the rising 50-day SMA.

Today’s report is divided into two parts. ETFs that led the market the last two months and hit new highs are in the first part. These include many tech and healthcare related ETFs. Second, there are ETFs that corrected over the last 1 to 3 months or were range-bound the last few months. These include small-caps, industrials, materials and finance related ETFs.

We basically witnessed a rotation away from ETFs related to banking, metals and housing. Tech and healthcare related ETFs picked up the slack with new highs in July. This rotation weighed on small-caps and mid-caps, but strength in large-cap tech stocks kept the S&P 500 SPDR afloat as it managed to grind higher.

The million Dollar questions: will the correction extend to techs and result a broad market correction? Or, will we see another rotation out of tech related names and into ETFs that corrected the last few months. Watch the charts for signs of breakouts in ETFs that are correcting.

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

Steady Uptrend, Leading


ETFs in this first group are in steady uptrends and leading the market right now. I covered SPY on Tuesday as it tested its rising 50-day SMA for the sixth time since November. This bounce off the 50-day SMA trade is getting quite crowded so I am not sure how much longer it is going to work. The chart below shows the Communication Services SPDR (XLC) with similar characteristics. There is a big breakout move in early November and a steady uptrend the last eight months. XLC rose some 40% from late October to mid July. Price dips below the 50-day and RSI dips into the oversold zone led to bounces and new highs.

The Healthcare SPDR (XLV) did not record a new intraday high, but it did record a new closing high on Wednesday, which makes it a clear leader. Notice that RSI did not dip below 50 on Monday and this means XLV held up better than most ETFs during the recent market dip.

The Real Estate SPDR (XLRE) came to the trend party a little later and did not break out until January. There was a hard throwback in early March and then a steady advance to new highs the last four months. There is no setup on this chart, just a steady uptrend and a market leader.

New High mid July, Leader, Triggered Stop


The Nasdaq 100 ETF (QQQ), Technology SPDR (XLK) and Medical Devices ETF (IHI) are in uptrends with relatively wide swings and new highs in July. They were hit fairly hard when the market pulled back last week and Monday. These sharp pullbacks triggered most ATR Trailing Stops and led to oversold bounces the last two days. Even with the bounces, these ETFs remain quite extended within their uptrends and I do not see any setups. The first chart shows the Technology SPDR (XLK) with a breakout in mid May and ~16 percent advance. The ATR Trailing Stop triggered with Monday’s gap down and this ends the trade based on the mid May breakout (blue arrow). XLK is still extended at this point and I do not see a short-term bullish setup right now.

The next chart shows the Medical Devices ETF (IHI) with a wide rising channel and new high on the most recent upswing (+11.6%). The ETF is also extended within this uptrend and the ATR Trailing Stop triggered with last week’s pullback. Keep in mind that the ATR Trailing Stop is for short-term traders looking to lock in profits or curtail losses. IHI is also extended within its uptrend and I do not see a bullish setup right now. Perhaps a pullback to the rising 50-day SMA will lead to a setup.

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

New High in July, Leader, Extended


The three tech-related ETFs in this group broke out of large triangle formations in early June and extended to new highs with big moves. They are also extended within their long-term uptrends. The chart below shows IGV with a 20+ percent advance off the May low. The ETF fell back after this high, triggered the ATR Trailing Stop and bounced the last two days.

Triangle Breakout, Oversold Bounce


The Biotech ETF (IBB) also sports a big triangle and a breakout in early June. The ETF did not hit a new high after the breakout, but the breakout held as price action turned choppy after the initial surge. IBB pulled back into mid July, became oversold with an RSI dip below 50 and bounced the last four days. This bounce looks fairly strong and keeps the big triangle breakout alive. The candlestick chart shows a StochRSI pop on Tuesday.

Channel Breakout late June


The next chart shows the Healthcare Providers ETF (IHF) with a new high in May and a channel pullback into late June. The ETF broke out of this channel, but price action has been quite choppy since the breakout. Overall, the channel is viewed as a correction within the bigger uptrend and the breakout is bullish. The yellow shading highlights Monday’s sharp decline that triggered the ATR Trailing Stop. The ATR Trailing Stop triggers when price closes below the stop and the exit is typically the next day. As noted in the strategy piece on trailing stops, traders can also consider placing a sell-stop order just below the low of the bar that triggered the stop. This is designed to prevent an exit on overshoot that results in an immediate recovery.

New High in July, Choppy Uptrend since February


The Semiconductor ETFs, SMH and SOXX, remain in very choppy uptrends. Both recorded new highs in July, but both are also below their February highs. They have higher lows from March to May and the overall trajectory of prices is up. However, this is a very choppy advance. Both were hit rather hard Thursday to Monday with RSI dipping into the oversold zone. They then bounced with big moves the last two days. Overall, buying the dips within the rising channel is working. Breakouts are not really working because each breakout is followed by a downswings. Nevertheless, the bias is bullish as long as the channels rise.

The Dividing Line for Performance

ETFs in the groups above are in uptrends and leading the market because they moved higher the last two months. ETFs featured below are correcting in some way, shape or form. Basically, money flowed out of these ETFs and into the tech-related ETFs over the last few months. Some have gone nowhere since February (IWM), some started their corrections in June (SLX) and some started their corrections in May (XLF). The list is fairly large and these are the underperforming parts of the market right now. Groups include: finance, banks, materials, steel, copper, timber, housing, industrials, infrastructure, agriculture and energy.

Several ETFs are correcting within bigger uptrends and this means there are bullish setups on some charts. However, I noted on Tuesday that the broad market environment is turning cloudy and breakout trades are not working well right now.

Falling Channel/Wedge since early June


ETFs in this group hit new highs in June and then corrected with falling channels or wedges the last few weeks. These patterns are typical for corrections within a bigger uptrend. The first chart shows the Finance SPDR (XLF) moving below its 50-day SMA with a sharp decline into mid June and then failing to get back above the 50-day on subsequent bounces. The ETF established resistance around 37 from mid June to mid July and a breakout here is needed to reverse the downswing (red line).

The next chart shows the Networking ETF (IGN) with a triangle breakout, a new high and a throwback to the breakout zone, which turns first support. RSI also dipped into the oversold zone (turned blue) and IGN bounced off this zone on Tuesday-Wednesday. Follow through with a channel breakout would end this pullback and signal a continuation higher.

The next chart shows the Global Auto ETF (CARZ) breaking out of a flat consolidation, hitting a new high and falling back into the consolidation. A strong breakout should hold and the deep dip back into the consolidation is a bit concerning. CARZ retraced around 2/3 of the breakout surge. While a picture-perfect falling channel or wedge did not form, the retracement amount is normal for a correction. The blue line shows the lower highs since mid June and a follow through breakout is needed to end this correction.

Falling Channel/Wedge since mid May


ETFs in this group hit new highs in May and then corrected over the last two months. Their corrections started earlier than ETFs that peaked in June, which means they are lagging for a little longer. These ETFs sport lower low and lower high sequences since May. The most recent lower low was on Monday and a break above the early July high is needed to reverse the slide. The first chart shows the Industrials SPDR (XLI) with a falling wedge and resistance at 104. The candlestick chart shows XLI falling 3% on Friday-Monday and surging 3.78% on Tuesday-Wednesday. These type of swings suggest an increase in volatility and this is more negative than positive.

The next chart shows the Home Construction ETF (ITB) with a deeper correction because it retraced around 50% of the prior advance and came close to its rising 200-day SMA. ITB surged the last two days, broke the wedge line and triggered a StochRSI pop on the candlestick chart. The short red line shows the ATR Trailing Stop for reference (66.01).

Falling Channel/Wedge since mid May


ETFs in this group also recorded new highs in May and corrected into mid July with lower lows and lower highs. ETF groups here include materials, copper, steel, agriculture and timber. I highlighted these in late June because they were correcting and several triggered StochRSI pops, which occurs when StochRSI surges above .80. This represents a momentum thrust of sorts and such moves can signal an end to a correction. The StochRSI pops in late June and early July failed because these ETFs moved lower Friday-Monday. Failed signals provide another sign that market conditions are less than ideal right now. The example below shows WOOD with a failed signal. We also saw failed signals in ICLN and PBW recently.

The next chart shows the DB Agriculture ETF (DBA) with a surge to new highs in April-May and a very choppy pullback into mid July. Overall, this falling channel is considered a correction within the bigger uptrend, which makes it a bullish continuation pattern. I highlighted DBA here because it held the June low in July and surged above the 50-day SMA. This makes it a little stronger than the others, which broke their June lows last week and remain below their 50-day SMAs.

The Copper ETF (CPER) is also holding up a bit better than the others because it did not break its June low. I cannot draw a nice wedge or channel on this chart, but the long-term trend is up and the decline since May is a correction within this uptrend. CPER stalled the last few weeks and established resistance just below 27. A breakout at 27 would be bullish and signal an end to the correction.

Big Trading Range since mid February


I covered the Russell 2000 ETF (IWM) on Tuesday and the S&P SmallCap 600 SPDR (IJR) looks just the same, as does the Russell Microcap ETF (IWC). These three have been rangebound since mid February and they bounced off the lower end of these ranges the last two days. The Mobile Payments ETF (IPAY) is also range bound since the second half of February, but it held well above its May low this week. Overall, a triangle is taking shape above the rising 200-day SMA and this is a bullish continuation pattern. A breakout at 72 would signal an end to the consolidation and a resumption of the bigger uptrend.

Oversold Bounce near April Low and 200-day


The energy-related ETFs were hit quite hard from mid June to mid July with the Energy SPDR (XLE) and Oil & Gas Equipment & Services ETF (XES) becoming very oversold (RSI below 30). Both fell toward their rising 200-day SMAs and bounced near their April lows with island reversals. The candlestick charts show the gap down on Monday, stall on Tuesday and gap up on Wednesday. This is a short-term reversal off support. The short red line on the bar chart shows the ATR Trailing Stop for reference.

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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