ETF Trends, Patterns and Setups – Industrial Metals ETF Lead, Tech-related ETF Follow Through, Clean Energy Perks Up (Premium)

Even though breadth during the recent pops was uninspiring, the bulls are not backing down and we are in a bull market environment, as per the Market Regime page. There are really only two trading/investing options in a bull market: long or cash. Short positions are not realistic options. There are still quite a few downtrends out there over the last few months, but also plenty of uptrends and we are seeing a revival among tech-related ETFs this week. Elsewhere, ETFs related to industrial metals remain strong overall.

Broad Market ETFs

The S&P 500 SPDR (SPY) is trying to end its pullback, but we have yet to see follow thru on the breakout attempt. The blue lines on the candlestick chart show short pullbacks or consolidations and the green arrows mark instances when Advance-Decline Percent exceeded +70% after a pullback. After the sharp drop-gap on September 20th, Advance-Decline Percent surged above +70%, but we did  not get any follow through and SPY fell below this low. Overall, a falling wedge formed and the long-term trend is still up. The falling wedge is typical for corrections within uptrends and SPY attempted another breakout with the big gap last Thursday. Alas, breadth was not strong and prices fell back the last few days. A follow through break above 440 with strong breadth would be bullish and suggest that the correction has ended.

QQQ and some other tech-related ETFs formed harami patterns last week and gapped up last Thursday. QQQ then fell back the last few days. Even though QQQ filled the gap, the overall pattern looks like a correction within a bigger uptrend. Note that the falling channel from early September to early October retraced 50% of the prior decline. Thus, the May-September advance was two steps forward and the September decline was one step backward. The pattern and retracement amount are also typical for corrections within bigger uptrends. As with SPY, follow through to last week’s surge is needed to complete the breakout and signal an end to the correction.

Small-caps are stuck in a trading range, but the cup is half full with a pennant breakout working. Note that IJR hit a new high in early June and the range narrowed into October so a big triangle formed. Technically, a triangle within an uptrend is a bullish continuation pattern because it represents a rest (after a 72% advance). A triangle breakout would signal an end to this corrective period and a resumption of the bigger uptrend. Short-term, IJR broke out of a small wedge last week and fell back with the rest of the market the last few days. This breakout is holding more or less and this is why the cup is half full. A close below the wedge low would reverse the short-term upswing.

Energy ETFs Extend

There is no change with the energy-related ETFs. XLE, FCG, XOP, XES and AMLP corrected into August and are in various stages of post-breakout price action. XLE, FCG and XOP are the strongest with new highs this week, while ALMP and XES broke out a little later and remain short of 52-week highs. These ETFs are simply in the trend-monitoring phase. The breakouts and trend signals have passed and I do not see short-term setups right now.

You can learn more about falling wedge patterns in this video.

Finance ETFs Edge Higher after Breakouts

The finance related ETFs broke out of long-term consolidation patterns in late September and are trading fairly close to these breakout zones. The Regional Bank ETF (KRE) and Bank SPDR (KBE) broke out in late September and edged higher the last three weeks. The Insurance ETF (KIE) is still in the midst of a breakout attempt after StochClose turned bullish last week.

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

Several metals-related ETFs are on the move with new highs in the DB Base Metals ETF (DBB) and Uranium ETF (URA) as well as short-term breakouts in the Lithium Battery Tech ETF (LIT) and Strategic Metals ETF (REMX). Copper is also perking up with the Copper ETF (CPER) breaking out of a wedge and the Copper Miners ETF (COPX) turning up. Hmm…seems like there is a theme here.

The first chart shows the DB Base Metals ETF (DBB) breaking out of a long triangle in early September, forming a small triangle into early October and breaking out last week. Zinc and aluminum are trading at multi-year highs and leading within DBB.

The next chart shows the Copper ETF (CPER) hitting a new high in May after a 67% advance from late September 2020 to early May 2021. The subsequent falling wedge retraced 33-50 percent of this advance and CPER found support in the 24.5 area the last three months. With a surge the last few days, CPER broke out of the wedge and this signals a continuation of the bigger uptrend. Also note that CPER exceeded its mid September high.

The next chart shows the Copper Miners ETF (COPX) getting a short-term breakout within the bigger falling wedge. COPX broke out last Thursday and followed through with a strong move the last four days. Given strength in copper, I would expect COPX to follow copper with a break above its mid September high.

The next chart shows the Uranium ETF (URA) surging 67% to a new high and then retracing 50% with a decline back to the 23 area. The ETF firmed for a few weeks with an uptick in noise in early October. Despite this short-term noise, the late September lows held (green line) and the setup remained: a pullback within an uptrend. URA can be a volatile rascal.  Chartists looking to remove some of this noise can consider focusing on closing prices (line chart).

Speaking of volatile rascals, the Strategic Metals ETF (REMX) is going for a wedge breakout. The ETF hit a new high in mid September with a 55% advance and then fell around 19% with a three-week falling wedge. Yes, this is one volatile ETF. REMX was oversold three times during this falling wedge (green arrows) and a StochRSI pop triggered on October 7th (last Thursday). The ETF followed with a price breakout the last few days.

The next chart shows the Lithium Battery Tech ETF (LIT) with a new high in mid August and a bull flag into October. I was watching the swing within this flag for the early clues of a bigger flag breakout. LIT became oversold on September 20th when the Momentum Composite dipped to -3 (green arrow). The ETF stalled for two weeks before getting a StochRSI pop on October 7th. The ETF then broke short-term resistance on Wednesday and this increases the chances of a flag breakout. The ATR Trailing Stop is shown for reference.

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

Tech-Related ETFs Follow Through

Even though follow-through was limited for SPY and QQQ, we did see strong follow-through in several tech-related ETFs. These charts have pretty much the same setups. First, the long-term trends are up. Second, they pulled back from early September to early October. Third, they formed harami patterns on October 4th and 5th. Four, they closed strong on October 6th and gapped up on October 7th (Wed-Thur). These gaps confirmed the harami, which are short-term bullish candlestick reversal patterns. Fifth, RSI formed a “W” pattern in late September and early October, and broke above the intermittent high. And finally, the ETFs pretty much held their gaps and continued sharply higher on Wednesday.

The first chart shows IGV with all these features marked on the chart. The 5.91 surge over the last seven days was quite strong and I will set 400 as the short-term level to watch for signs of a failure.

The next charts show similar setups for the Cloud Computing ETF (SKYY), Cybersecurity ETF (CIBR) and Internet ETF (FDN).

While on the topic of techs, let’s look at semis, which are lagging short-term because the Semiconductor ETF (SOXX) fell back to its early October low this week. Overall, the long-term trend remains up for SOXX with a choppy rising channel since February. The ETF is below its April high and has nothing to show the last six months, but the trend is still up and the ETF did hit a new high in mid September. Thus, we have a pullback within an uptrend and a potential bullish setup short-term. SOXX formed another harami (inside day) the last two days and a surge from here would confirm the pattern. The first window shows RSI and a breakout at 45 would be short-term bullish for momentum. The bottom window shows StochRSI failing to pop from late September to mid October. Thus, look for a StochRSI pop for early signs of a short-term reversal.

There are several ETFs with downtrends over the last three to five months. These downtrends were enough to turn StochClose bearish, but price chart analysis suggests that these downtrends could be extended corrections after big advances. There are two ways to approach a trade. One: wait for a break of the bigger downtrend and/or a StochClose bullish signal. Two: identify a short-term reversal within this downtrend for an early bird signal.

The chart below shows the Materials SPDR (XLB) with an example. The blue lines define the falling channel since May. This channel formed after a 42% advance and it retraced around a third, which is pretty normal for a correction within a bigger uptrend. A breakout at 86 is needed to reverse this channel. Within the channel, XLB fell to the 78-80 area and firmed the last few weeks. The Momentum Composite also became oversold (green arrows). XLB gapped up last Thursday and held this gap the last five days. Thus, it looks like a short-term breakout is in the making.

The next charts show the Infrastructure ETF (IFRA) attempting a reversal within the five month downtrend and the Industrials SPDR (XLI) firming after retracing 25-33 percent of the prior advance.

Within the Industrials sector, the Aerospace & Defense ETF (ITA) is holding above its triangle breakout and flag breakout. It is not the most exciting industry group out there, but is more predicable and stable than the airline industry (JETS).

While on the industrials and swings within patterns, the Space ETF (UFO) formed a big triangle consolidation after a 52-week high in February – kind of like the S&P SmallCap 600 SPDR (IJR). UFO surged in late August with a short-term breakout and then retraced two thirds with a dip to the 30 area in mid September. The ETF firmed the last few weeks and a breakout at 31 would be short-term bullish. This is an example of the early short-term signal to anticipate the later long-term signal (triangle breakout).

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.

REIT ETFs got a bounce the last few days as the 10-yr Treasury Yield fell and the 20+ Yr Treasury Bond ETF (TLT) moved higher. As with XLU, these seem to be positively correlated with TLT. The first chart shows the REIT ETF (IYR) with a falling channel correction, a bullish engulfing last week and a breakout this week. Also notice that the Momentum Composite was oversold into late September (green arrows) and there was a StochRSI pop last Tuesday (green line). The breakout is valid as long as this week’s low holds (green line). The second chart shows the Residential REIT ETF (REZ) with similar characteristics.

The Healthcare SPDR (XLV) and Medical Devices ETF (IHI) also sport pullbacks after new highs, but they are at different stages because they have yet to break short-term resistance. The first chart shows XLV with five oversold readings as it fell from early September to early October (green arrows). There was a StochRSI pop during this fall, but it did not result in a short-term reversal. Not all signals work. There was another StochRSI pop last Thursday and XLV fell back this week. A follow through break above last week’s high would reverse the short-term downtrend.

The Medical Devices ETF (IHI) is a little different because it broke out last week and then fell back. This could be short-term noise similar to what we saw in the Uranium ETF (URA). Overall, the setup remains bullish as IHI hit a new high and then retraced 50% of the prior advance. The ETF became oversold for four days into early October (green arrows) and I am now watching for a short-term breakout. Note that StochRSI did not pop last week so that is also something to watch going forward.

The clean energy ETFs led the market from March 2020 to January 2021 with astronomical gains (400+ percent). They then fell on hard times from February to May with sizable declines. These ETFs have not done much since May, but a surge this week suggests that a higher low is forming and a breakout is in the making.

The first chart shows the Clean Edge Green Energy ETF (QCLN), which is one of the few high flyers with a StochClose bullish signal that held in September-October (see bottom window). This makes it one of the stronger ETFs in the group. On the price chart, QCLN advanced from May to June and then formed a long triangle consolidation. The ETF held support near 60 with a gap and 10% surge the last five days. Thus, the higher low, bullish continuation pattern and bullish StochClose signal argue for a triangle breakout and continuation of the May-June advance. A close below 60 would argue for a re-evaluation.

The next chart shows the Solar Energy ETF (TAN) with similar characteristics, except one. StochClose triggered bullish in mid September and then bearish again on October 8th. The ETF then surged over 10% and StochClose is back near 60, a cross of which would trigger bullish. I think I just saw several readers throw up their hands in exasperation with these whipsaws. There are two things to keep in mind. First, StochClose signals are systematic trend-following signals. On average, 60% will result in losses and 40% will result in profits. This is why we backtest: to set realistic expectations. Second, chart analysis, even objective analysis, can differ from the systematic trend signal because StochClose is locked into the 125-day timeframe. Chart analysis is more flexible and can consider the bigger picture.

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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