ETF Trends, Patterns and Setups – Large-caps Still Leading, Pullbacks after New Highs in Play, GLD Firms in Reversal Zone (Premium)

The Fed has come and gone without much of a surprise, and the markets are saying good riddance. The market appears to be relieved that the statement is out of the way and the news flow will hopefully lessen. Volatility picked up significantly with the plunge on Back Friday and continued into Wednesday with the big reversal day. I do not know if this means volatility will subside now, but Fed policy is clear and this removes an uncertainty.

There are a lot of short-term pullbacks in the works and the increase in market volatility played havoc with breakouts. There were a slew of short-term breakouts as stocks gapped and surged on December 7th. There was no follow through to these breakouts as buyers went on strike ahead of the FOMC policy statement. With the stock market reversing course on Wednesday and heading for a strong open on Thursday, these short-term breakouts will be back in play. Note that I am talking about short-term pullbacks and breakouts within bigger uptrends.

Looking ahead, seasonal patterns for the second half of December are bullish and there is also the famous Santa Claus rally. This period begins on December 24th and extends to the second trading day of January. Check out Jeffrey Hirsch of the Stock Trader’s Almanac for more details.

December Scheduling

I need to adjust the commentary and video schedule in December to account for the holiday period, which has pretty much begun. I need to take the next two Saturdays off and the schedule will be as follows.

  • Tuesday 14-Dec: ETF Commentary
  • Thursday 16-Dec: ETF Commentary
  • Friday 17-Dec: Market Regime Update and Weekly Video
  • Tuesday 21-Dec: ETF Commentary
  • Wednesday 22-Dec: ETF Commentary
  • Thursday 23-Dec: Market Regime and Weekly Video
  • Friday 24-Dec: Christmas Eve (day off)
  • Saturday 25-Dec: Christmas Day (day off)

Using Benchmark Highs and Lows

I use benchmark highs (peaks) and lows (troughs) to separate the leaders from the laggards. Most recently, the September high is a benchmark high and any ETF hitting a new high in November or December is a leader. The September-October lows are benchmark lows and any ETF breaking these lows are laggards. ETFs that hit new highs in November and held well above the October low during the chaos of the last few weeks are leading with clear uptrends.

The chart above shows four tech-related ETFs with examples using these benchmark highs and lows. SOXX is holding up the best, by far. CIBR is second because it hit a new high and held above its October low. IGV is third because it hit a new high, but exceeded its October low. There is a big battle going on in this area now. FDN is by far the weakest of the four because it formed a lower high in November and decidedly broke the October low.

Among the major index ETFs, SPY and QQQ are leading with new highs in November and pullbacks that did not even come close to their October lows. SPY and QQQ fell with the rest of the market this week, but they did not break their early December lows and rebounded sharply on Wednesday afternoon. The chart below shows SPY with a rather volatile pennant taking shape. I am not encouraged with the volatility, but the overall trend is up and a pennant is a short-term bullish continuation pattern.

SPY surged with strong breadth on December 2nd as Advance-Decline Percent exceeded +80% (green arrow/bar). Advance-Decline Percent hit 59.6% on Wednesday and was not as strong, but the Zweig Breadth indicator moved to .60 and a move above .615 would trigger a Zweig Breadth Thrust.

QQQ also sports a pennant. My concern with QQQ is that Advance-Decline Percent plunged below -80% twice in the last few weeks (red bars) and has yet to counter this with a surge above +80%. Also notice that Nasdaq 100 High-Low Percent exceeded -10% on December 1st and has yet to get back above +10% (yellow shading). Keep in mind that QQQ is a large-cap dominated ETF with the seven largest stocks accounting for 49% (AAPL, MSFT, AMZN, GOOGL, TSLA, FB, NVDA). Weakness in breadth is more of a concern for Nasdaq 100 Next Gen ETF (QQQJ) and The Equal-weight Nasdaq 100 ETF (QQEW).

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Overall, large-caps are leading, small-caps are lagging and mid-caps are stuck in the middle. Of the three groups, large-caps are still the place to be. The S&P 500 EW ETF (RSP) and S&P MidCap 400 SPDR (MDY) hit new highs in November and fell rather hard into early December. Despite a hard fall, they held above their September-October lows in early December and the bigger trend is still up. I don’t see a pennant on the MDY chart because the dip into early December was so deep.

IWM exceeded its Sep-Oct lows, but managed to hold the bigger support zone extending back to March.  The ETF popped with the rest of the market on December 7th, but fell back hard this week and exceeded the early December low. Even though IWM is struggling overall, support is at hand and Wednesday marked a reversal day, even if it occurred after a little Fed Kool-Aid. A follow through breakout at 220 would be short-term bullish.

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.

Note that I covered the defensive sectors on Tuesday (XLP, XLU, XLRE, XLV). The Networking ETF (IGN) is separating itself from the crowd as one of the few equity ETFs that recorded a new high on Wednesday. IGN broke out of a big falling channel and hit a new high in November. The ETF fell back into early December and became oversold as the Momentum Composite dipped to -3 and -4. IGN then broke out and surged to new highs.

The Home Construction ETF (ITB) hit a new closing high on Friday and an intraday high on Monday. Overall, the ETF broke out of a big triangle in late October and is up around 25% the last five weeks. This makes it one of the best performing ETFs since early October. There is no setup here and the ETF is getting quite extended.

The Next Gen Connectivity ETF (FIVG) and Semiconductor ETF (SMH) continue to hold up well as both simply consolidated near new highs from late November to early December. The first chart shows the FIVG with a pennant and a break above the upper line on Wednesday. The second chart shows SOXX with a flatter consolidation more akin to a bull flag. This is a bullish continuation pattern and a breakout would signal a continuation higher.

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The Materials SPDR (XLB) hit a new high in November, pulled back into early December and held well above the Sep-Oct lows. This makes it a leader. Short-term, XLB broke out last week and held the breakout this week. The Materials SPDR (XLB) is more like an industry group ETF because chemical stocks account for 69.38%. The other groups are Metals & Mining (13.53%), Containers & Packaging (11.67%) and Construction Materials (5.42%).

There were several ETFs with short-term breakouts last week and hard pullbacks this week. This means we can use the early December low as a benchmark low. Short-term, ETFs that held above this low are holding up better than ETFs that broke this low. The chart below shows the Robotics Automation ETF (ROBO) with a falling wedge pullback into early December, a breakout last week and a pretty hard pullback this week. Even though the breakout failed to hold, ROBO managed to hold above the early December low. Chalk up the big pop and drop to the recent uptick in volatility. In any case, the bigger trend is up, ROBO held the early December low and the short-term breakout is still in the making.

The next chart shows the Cybersecurity ETF (CIBR) with a sharp pullback into early December, a gap-surge on December 7th and a pullback that held above the early December low. The pullback is deemed a short correction within a bigger uptrend and a breakout at 52 would reverse this downswing.

The Software ETF (IGV) has been all over the place this month with 3 swings that were greater than 3% (down, up, down) and two gaps (up, down). The pullback in CIBR appears more controlled than the pullback in IGV, which is steeper. Personally, I prefer a more controlled pullback with less volatility. On the IGV chart, the ETF gapped up on December 7th, stalled for four days and then gapped down. There was no follow through to the gap-surge. IGV is going to get a second chance and a break above last week’s high would be short-term bullish.

Oil popped with the rest of the market last week and then edged lower over the last few days. Oil actually held up quite well because the pullback over the last five days was quite controlled and modest. The chart below shows WTI Intermediate ($WTIC) with a new high in December and a higher low from August to December (green dotted line). WTI surged off this trendline with a move above 70 and then edged lower the last five days. Overall, the oversold bounce remains in play (short-term bullish) and this is net positive for energy related ETFs.

The next chart shows the Oil & Gas Exploration & Production ETF (XOP) with a new high in November, a pullback into early December that retraced 50% and a falling channel type pattern. XOP broke out last week, but got caught up in broad market volatility and fell back hard this week. The ETF is above the early December low and I still view this as a pullback within a bigger uptrend. Watch for another breakout to reverse this downswing.

The Oil & Gas Equipment & Services ETF (XES) fell all the way back to its summer low in early December and surged with a short-term breakout last week. XES closed below the breakout level on Tuesday, but remains near a big support zone that extends back to January. We cannot call this an uptrend. Instead, this is a trading range and I am watching for reversals off support. Such a reversal is in the making and a close below Wednesday’s low would call for a re-assessment.

The Strategic Metals ETF (REMX), Lithium Battery Tech ETF (LIT) and Uranium ETF (URA) hit new highs in November and then pulled back into mid December. All three dipped below their early December lows this week and are not holding up as well as ETFs that held above these lows (short-term). All three have above average volatility (risk) and this does not seem like an ideal time to be adding risk. The charts below show REMX with a pennant, LIT with a slightly deeper pullback and URA with a test of the Sep-Oct lows.

The three Electric Vehicle ETFs (IDRV, DRIV, CARZ) hit new highs in November and pulled back from these highs over the last few weeks. These pullbacks are pretty tame for the most part. The chart below shows the Self-Driving EV Tech ETF (IDRV) with a new high and a small wedge or pennant forming. IDRV dipped below the early December low on Tuesday and held above Tuesday’s low on Wednesday. In other words, the pre-Fed dip was not as deep as for others. IDRV closed strong on Wednesday and a follow through breakout would be short-term bullish.

The Regional Bank ETF (KRE) and Bank SPDR (KBE) broke out of long consolidation patterns in late September, hit new highs in November and fell back into early December. Last week’s pop was rather subdued and they remain in pullback mode. The chart below shows KRE retracing half of the Sep-Nov advance and this is a potential reversal zone. KRE bounced the last two days and a break above last week’s high would signal an end to the pullback and a resumption of the bigger uptrend.

The Infrastructure ETF (IFRA) is all over the place as it broke out in early November, fell back sharply into early December and surged last week. Overall, the channel breakout in early November is long-term bullish. The deep pullback after the breakout was excessive, but it retraced 2/3 of the prior advance and was not enough to derail the bigger uptrend. IFRA got a strong bounce last week, pulled back and held the breakout zone more or less. There is a lot of noise (volatility) around this breakout, but I still view this chart as more bullish than bearish.

The Medical Devices ETF (IHI) remains within a bigger bullish consolidation (blue dotted line), but the swing within this consolidation turned up with the breakout last week. IHI fell back to the breakout zone on Tuesday and surged on Wednesday to keep the short-term breakout alive. A move above 65 would trigger a bigger triangle breakout and resumption of the bigger uptrend.

The Metals & Mining SPDR (XME) actually looks a lot like the Oil & Gas Equipment & Services ETF (XES): a trading range for months and an attempt to bounce off range support. The swing within the trading range is down for XME with last week’s high marking short-term resistance. A breakout here would reverse this downswing and argue for a challenge to the bigger resistance level. Note that XME is a play on steel because this group accounts for 43.4%. Other groups include aluminum (14.6%), gold (12.9%), diversified metals (10.4%), coal & consumable fuels (9.8%), copper (5.1%) and silver (3.8%).

The Copper ETF (CPER) and Copper Miners ETF (COPX) both broke out with big surges in early October and then fell back from mid October to mid December. The pullback in CPER formed a falling wedge and extended longer than expected, but copper is holding above the September lows and this is still considered a pullback after a breakout surge. Thus, it is a bullish continuation pattern and a break above last week’s high would reverse the fall.

The Copper Miners ETF (COPX) broke out of its smaller wedge with a surge last week and fell back with the rest of the market this week. Broad market noise and volatility are toying with the breakout, but the overall pattern and setup are still bullish. With Wednesday’s intraday reversal, chartists can use a close below 34 to re-evaluate.

Despite a hard throwback into early November, the DB Base Metals ETF (DBB) remains in an uptrend as it continues to test support in the 20.5 area (green shading). Watch for a break above last week’s high to signal an end to this corrective period and a resumption of the bigger uptrend.

The Gold SPDR (GLD) remains in a potential reversal zone after it broke out with an 8% surge and retraced 2/3 with a decline to 165 area. This is a potential reversal zone because it represents a pullback after the breakout surge. The retracement is also normal, as is the return to the breakout zone. GLD did overshoot, but overshoots are the norm right now in the markets. Watch for a break above 168 to signal an end to the pullback phase and a resumption of the bigger breakout.

The Biotech ETF (IBB) remains in a volatile uptrend since January and a downswing since September. The ETF fell all the way back to the spring lows and bounced with a big three day reversal in early December (blue shading). IBB was also oversold at this stage (red arrows). IBB did a pop, drop and pop the last seven days with the most recent pop occurring on Wednesday. This firming affirms support in the 143-145 area and a break above the early December high would be bullish.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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