ETF Trends, Patterns and Setups – Lockdown-Tech ETFs form Bullish Continuation Patterns, Reflation ETFs Break Out

Don’t like the current rotations in the stock market? Wait a week and it will change. Tech stocks led the market higher immediately after the election with big moves last Wednesday, Thursday and Friday. The reflation trade then took over this week as some of the worst performing groups surged (finance, defense, banks, energy). Money moved out of tech and lockdown related ETFs to fund this rotation.

Even though we are seeing new leadership emerge over the last few weeks, keep in mind that these tech and lockdown related ETFs are still in long-term uptrends and most just consolidated the last two months or so. A consolidation after a monster move is quite normal and represents the pause that refreshes. In other words, these consolidations are bullish continuation patterns.  

Tuesday’s pop and drop is more noise than substance. Stocks surged on Tuesday with massive gaps in several broad market and industry group ETFs (IWM, KRE, XLE). SPY opened at 364 and closed at 354.5. The ETF was still up on the day, but fell after the sharply higher open. As shown on the SPY chart above, traders should consider close-only (line) charts when intraday moves get noisy. Line charts filter out this noise and help us keep the bigger picture in mind.

ETF Grouping and Ranking by Trends, Patterns and Setups

Uptrend, New High this Week


ETFs in the first three groups are leading because they recorded fresh 52-week highs this week (closing prices). Some recorded new 52-week highs in September and October as well (SOXX, PBW). There are no short-term setups on these charts right now, just market leading uptrends.

The first chart shows the S&P 500 EW ETF (RSP), which represents the “average” stock in the S&P 500. RSP was lagging SPY from July to October because it had yet to break out. That changed this week as the ETF broke out of an Ascending Triangle with a huge gap on Tuesday. Strength in financials, industrials and energy changed this laggard into a leader.

So the breakout is bullish and the ETF is up over 10% in two weeks. Overbought conditions like this are short-term neutral and long-term bullish. The big trend is up so there is no need to be short-term bearish because of a strong buying surge. Neutral is enough. This two week momentum surge and breakout are long-term bullish because they show exceptionally strong buying pressure. The breakout zone around 112 turns first support to watch should we get a throwback (test of the breakout zone).

The Semiconductor ETF (SOXX) remains the strongest of the tech-related ETFs. SOXX hit new highs in October and November, while the Software ETF (IGV), Internet ETF (FDN) and Cloud Computing ETF (SKYY) stalled. Also note that SOXX is up over 30% year to date and its fifth biggest holding (Intel 6.62%) is down over 20%. Crazy how Intel has been sidelined this year. On the price chart, SOXX sports a steady uptrend interspersed with bullish pullbacks and consolidations.

Rising Channel, Surge, 52-week High


ETFs in this group were advancing within rising channels and they surged above the upper lines this week. Keep in mind that short-term overbought in a bigger uptrend creates a neutral trading condition, not a bearish condition. Mid-caps, small-caps and industrials led this charge as they finally managed to score new highs. The chart below shows IWM with an island reversal the prior week and a massive surge on Tuesday.

The red line shows the ATR Trailing Stop, which is three ATR(22) values below the highest close since the island reversal. A move below this stop would also fill Tuesday’s gap and show some cold feet. While concerning, such a move would not be enough to reverse the overall uptrend and would likely set up a mean-reversion opportunity should RSI move into the oversold zone (30-50). The next chart shows XLI with similar characteristics.

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

Consolidation Breakout, 52-week High*


ETFs in this group are part of the materials sector, except for the DB Agriculture ETF (DBA). The Materials SPDR (XLB) is 69% chemicals, 14.35% containers/packaging, 12% metals/mining and 4.5% construction materials. XLB is mostly a play on the big chemical stocks (LIN, APD, DD, DOW, ECL). The chart below shows XLB consolidating with a triangle from September to October and breaking out in November.

The next chart shows the Metals & Mining SPDR (XME) with a triangle consolidation above the 200-day SMA and breakout late last week. Notice that RSI bounced off the oversold zone as well. These breakouts are bullish, but keep in mind that prices could dip back into the triangles with a little volatility. Such moves would not affect the longer-term uptrends and could provide another mean-reversion setup.

The next chart shows the DB Base Metals ETF (DBB) breaking out in mid October, testing the breakout zone in late October and moving to new highs this week. The ATR Trailing Stop is shown for reference.

The DB Agriculture ETF (DBA) is nowhere close to a new high, but the ETF held the September lows in late October and broke out of a consolidation this week. The gap down in late October created a mean-reversion setup because the ETF was at support and RSI was in the oversold zone.

Uptrend, Near 52-week High


ETFs in this next group sport uptrends overall, but they fell just short of fresh 52-week highs this week (based on closing prices). The chart below shows the Retail SPDR (XRT) opening at a new intraday high on Tuesday and then closing below the October closing high. I do not view this pop and drop as negative because it is just one bar and the overall trend remains up. The September-October lows mark clear support in the 49 area. A close below this zone would forge a lower low and call for a reassessment.

The Biotech SPDR (XBI) continues to work its way higher since the mid September channel breakout and continues to perform better than the Biotech ETF (IBB), which has not recorded a new high since July. XBI broke out of a falling wedge last week as RSI bounced off the 40-50 zone. The ETF formed a short-term bullish pennant this week.  

Triangle/Channel Breakout, Near 52-week High (close)


The S&P 500 SPDR (SPY) is suddenly way down the list in this report, but is by no means bearish. SPY hit a new high in early September and then consolidated with a triangle into early November. RSI became oversold in late October and SPY surged above the upper line for a breakout. The ETF recorded a new high intraday, but not a new closing high. Again, forget about Tuesday’s pop and drop, and focus on the bigger triangle. The second chart shows the Communication Services SPDR (XLC) with a triangle breakout.

Ascending Triangle Breakout, short of 52-week High


The S&P SmallCap 600 SPDR (IJR) and High-Yield Bond ETF (HYG) broke out of Ascending Triangle patterns this week, but both are short of 52-week highs. I switched to a line chart because the intraday spikes were distorting recent price action. Overall, the breakout in HYG reflects a narrowing of yield spreads and this is bullish for stocks, especially credit sensitive banks.

Reversal within Triangle, Breakout Attempt


QQQ and the tech-related ETFs are way down the list today, but they are by no means bearish. Keep in mind that QQQ advanced some 85% and hit a 52-week high in early September. The ETF is entitled to a rest after such a monster move and rest it did with a triangle consolidation. At the risk of repeating myself, a triangle within an uptrend is a bullish continuation pattern and QQQ turned up with a surge on November 4th, the day after the election. The ETF is currently battling the upper line of the triangle, but I expect a new high because the path of least resistance is up. In other words, the long-term trend is up and this is a bull market.

Multi-Month Bullish Consolidation, Long-term Uptrend


The next ETFs are in uptrends and were once leading. They are still leading on longer timeframes, such as six to nine months. They are lagging on the one to three month timeframes because they are in consolidation patterns, just like QQQ. The first two charts show the Software ETF (IGV) and Internet ETF (FDN) with Ascending Triangles. The second two show the Cloud Computing ETF (SKYY) and Cyber Security ETF (HACK) turning up within their consolidations.

Falling Wedge Breakout, Short-term Market Leading Surge


The Regional Bank ETF (KRE) is up over 30% from its late September low, and yet it still closed below the June high on Wednesday. KRE is clearly leading the market since late September (seven weeks), but it is still lagging since early June and year-to-date. Even so, the overall chart is bullish. A big falling wedge retraced two thirds of the March-June surge and the breakout reversed the June-September decline. Careful if chasing at this stage and forcing a shot. Instead, consider exercising some patience and wait for a better shot. I would prefer wait for a throwback to the breakout zone (~41) or a short-term bullish consolidation to take shape.

Long Multi-month Triangle, Breakout


The next group of ETFs formed long triangle consolidations over several months and broke out. XLU was first to breakout in early October and the rest followed with huge moves on Tuesday. The chart below shows the Finance SPDR (XLF) with a huge move higher in mid May (green shading), a two day dip and another surge into early June. No two moves are the same, but we could see follow through to Tuesday’s surge before a meaningful pullback or consolidation takes shape. For now, the gap and breakout are bullish and the breakout zone turns first support to watch on a pullback.

Long Multi-month Falling Wedge or Decline, Breakout


The next group of ETFs surge into early June and declined into October with large falling wedges. They held well above their March lows in October and broke out with surges the last two weeks. Technically, a wedge that holds well above a prior low is a corrective pattern. This means the breakouts ended the correction and signal a resumption of the bigger uptrend. The chart below shows the Oil & Gas Equipment & Services ETF (XES) with this setup. While the breakout is bullish, I am more in the wait-and-see camp because there are stronger charts out there (such as ETFs in the groups mentioned prior to this one).

The Alternative Harvest ETF (MJ) is perhaps more interesting than XES and XLE because it formed a higher low in October, broke out and already fell back to the 200-day (throwback). StochClose is also close to turning bullish for the first time since July 2019. Careful: this is a low priced ETF with above average volatility.

Flat Consolidation since June, Surge off Support


When does a corrective downtrend turn into a long-term downtrend? Basically, when a long-term trend indicator turns bearish, such as a cross below the 200-day SMA or StochClose bearish signal (cross below 40). Gold and the precious metals ETFs are still in corrective mode and their medium-term downtrends have yet to turn into long-term downtrends. The 20+ Yr Treasury Bond ETF (TLT), on the other hand, is in a different boat because its medium-term downtrend turned into a long-term downtrend (see below).

I am just showing the Gold SPDR (GLD) chart because the other three ETFs are highly correlated to gold and move in the same direction (SLV, GDX, DBP). Gold is the main driver here. The dashed lines show the prior falling wedges and prior breakouts, which failed. The solid lines mark the current falling channel that defines the downtrend. A break above the October-November highs would reverse this downtrend.

Some of the classic technical analysis books cover fan lines. Basically, one draws three lines from a high and the third breakout is the charm. Gold is frustrating because the last two breakouts failed. A move above the third line would trigger this fan-line signal and perhaps be the charm.

Lagging, Downtrends and Off my Radar

Falling Wedge since August, Breakout Attempt: LQD

Long Multi-month Triangle, Challenging Resistance (no breakout): XLRE

Falling Channel Since August, Breakout, Above 200-day: DBE

Downtrend since August, Long-term Downtrend: TLT, AGG

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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