ETF Trends, Patterns and Setups – Mixed Market with Strength in Cyclicals and Non-Cyclicals, Large Cap Techs Perk Up (Premium)

The market continues to be mixed and bullish. Techs and high-flying ETFs led the correction from the February highs to the March lows, but we are now seeing signs of short-term leadership in large-cap techs, namely QQQ and XLK. These two held well above their early March lows and broke out of flag patterns. Other tech-related ETFs and high-flyers are attempting to end their corrections and resume their uptrends. These ETFs are still near the bottom of the report because they are lagging ETFs that are at or near new highs.

Speaking of new highs, we are seeing leadership in industrials, materials, steel, housing, and transports. This group is tied to the domestic economy, construction and the manufacturing base. In keeping with the mixed theme, we are also seeing strength in defensive sectors (Consumer Staples) and high-yield sectors (XLU, XLRE). It is a bit strange to see defensive and non-cyclical groups performing well along with cyclical groups. It is what it is and the market remains bullish overall.

I am still tallying the votes for the chart layout poll. Check out this page if you have yet to cast your vote.

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

New High, Leading

XLI, XLP, XLB, ITB, IYT, IHF, SLX

Old school infrastructure-related ETFs are leading with new highs in the Industrials SPDR  (XLI), Materials SPDR (XLB) and Steel ETF (SLX). Elsewhere, we also saw new highs in the Home Construction ETF (ITB) and Homebuilders ETF (XHB), which bodes well for the domestic economy.

The first chart shows XLI with a multi-month consolidation and breakout towards the end of February. The ETF simply worked its way higher the last six weeks and continues to hold the ATR Trailing Stop. Notice that RSI has not been below 50 since February 2nd and this shows relative strength throughout March.

The next chart shows XLB breaking out of a triangle pattern on March 8th and working its way to new highs the last few weeks. As the long-term chart in the upper left shows, there is a strong zigzag advance underway since May, which is when StochClose turned bullish. There is no setup right now so it is simply time to monitor the trend and wait.  

The next chart shows ITB with a triangle breakout in mid January (dot chart) and a flag breakout in early March (candlestick chart). There are also two versions of the ATR Trailing Stop, which depends on the pattern in play. The triangle breakout is a bigger pattern and warrants a wider stop than the flag breakout.

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

Zigzag Uptrend, Near New High

SPY, XME

The first three charts featured the dot charts (closing prices) in the main window. This next chart shows bars in the main window, which are a bit noisier because of the intraday highs and lows. Nevertheless, we can see a big triangle, a breakout in early November and a zigzag higher since the breakout (uptrend). The candlestick chart in the lower left shows two flag breakouts in March and two StochRSI pops, which are short-term bullish. With the surge over the last five days, support at 384 is reinforced and I will remain firmly bullish on SPY as long as this level holds on a closing basis.

The next chart shows the Metals & Mining SPDR (XME), of which 50% of the holdings are steel stocks (NUE, CLF, X, STLD, RS, ATI, WOR, SCHN). XME hit a new high on March 11th and then fell pretty hard with a decline below 37. This was a pullback within a bigger uptrend and the candlestick chart shows an island reversal with a long white candlestick last Friday.

Multi-week Consolidation within Uptrend, Near New High

PHO, CARZ

It is not everyday that we have the Water Resources ETF (PHO) and Global Auto ETF (CARZ) in the same group. They are here because they have similar patterns: long-term uptrends and multi-week consolidations within these uptrends. A consolidation within an uptrend is a bullish continuation pattern. It represents a rest within that trend and a breakout signals a continuation higher. Note that CARZ was featured in Wednesday’s commentary.

The first chart shows PHO challenging resistance from an Ascending Triangle. This pattern digested the prior 21% advance and set the stage for the next leg higher, at least that’s the theory. Even with a breakout, we could see some backing and filling with a dip back into the pattern. I will stay bullish as long as the March lows hold. The candlestick chart shows the pattern within the pattern play: a bull flag within the Ascending Triangle. PHO broke out last Friday with a big move.

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

Modest Correction, Breakout in March

XLV, IHI, SOXX, HYG

It is also not everyday that we have the Healthcare SPDR (XLV) and Medical Devices ETF (IHI), non-cyclical groups, with the High-Yield Bond ETF (HYG) and Semiconductor ETF (SOXX), cyclical groups. The first chart shows XLV with a channel breakout on the dot chart and a flag breakout on the candlestick chart. The ETF is very close to a new high and clearly in an uptrend (see rising channel in upper left chart). As we can see with the deep dips in early November and early March (yellow arrows), this ETF is also not immune to overshoots and sharp recoveries.

The next chart shows the High-Yield Bond ETF (HYG) with a falling wedge correction into mid March and a breakout surge the last two weeks. This breakout signals an end to the correction and a resumption of the uptrend. The surge in junk bond prices points to a narrowing of junk bond yield spreads, which is positive because it shows more confidence in the credit markets.

The next chart shows SOXX with a sharp dip to the 50% retracement, a sharp rebound, a flag and a flag breakout (all on the dot chart). Notice that SOXX did not come close to the March 8th low (yellow arrow) when the flag formed. This showed relative strength because several other tech-related ETFs fell back to this March 8th low.

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

Multi-week Pullback within Bigger Uptrend

COPX, DBA

The Copper Miners ETF (COPX) and DB Agriculture ETF (DBA) hit new highs in late February and then corrected with declines in March. Both became oversold as RSI moved into the 30-50 zone and falling channel/wedge patterns formed. The first chart shows COPX finding support in the 50-67% retracement zone and near the prior breakout (blue shading). The ETF bounced the last four days and the candlestick chart shows StochRSI with a pop above .80, which is the early sign for an upturn.

As the StochRSI pop on March 10th shows, not every pop results in a successful breakout. This is why we need to plan our trade, trade our plan and have some diversification.

The next chart shows DBA with an overshoot below the lower trendline of the falling channel and a long white candlestick on Wednesday. This bullish engulfing (green shading) also triggered a StochRSI pop, which is the second such pop this month.

Consolidation within Uptrend, Double W Working

IPAY

The Mobile Payments ETF (IPAY) fits with the group above because it has a multi-week correction after a new high. A wide falling channel is forming on the dot chart and a triangle on the candlestick chart. These are medium-term bullish continuation patterns and a breakout at 71 would be bullish. Short-term, there is a setup within the pattern as the Double W takes shape over the last seven days. A break above last Friday’s high on the price chart and an RSI break above the intermittent high would be short-term bullish.

The Double W is a relatively new idea that has not been tested. An astute subscriber noted that Constance Brown used a W breakout technique for RSI. M and W price patterns have also been around for a long time (Arthur Merrill CMT). This is just a way to look for a short-term breakout in both price and RSI. As with StochRSI, the Double W is designed to get the jump on a bigger breakout. It is also likely prone to whipsaws because it is so short-term.

Deep Correction, Higher Low in March, Flag Breakout

QQQ, XLK, XLY, FAN

ETFs in this group corrected fairly hard from late February to early March, bounced into mid March and held well above their early March lows last week. The ability to hold well above the March 8th low showed relative strength and we are seeing flag breakouts with strong moves the last five days.

The chart below shows the Nasdaq 100 ETF (QQQ) with a three chart layout and a bar chart. QQQ hit a new high in late February and then declined back to the breakout zone with a 50-67% retracement of the November-February advance (blue shading). The retracement amount and return to the breakout are normal for corrections within bigger uptrends. A falling channel/flag formed and QQQ broke out with a surge into mid March. The candlestick chart shows QQQ falling back to the breakout zone with a small flag last week, bouncing off this zone and breaking out this week. Also notice that StochRSI popped above .80 for the second time this month. The first breakout held and support remains at 311.

Deep Correction, Slightly Higher Low in March

IGV, FDN, SKYY, CIBR, HERO, ESPO

ETFs in this group sport deep corrections from the February highs to their early March lows. Despite big declines, they held above their rising 200-day SMAs and are considered in long-term uptrends. They bounced in mid March and then fell into late March, but held above the early March lows. These ETFs are still underperforming over the last six weeks, but they show signs of firming.

The first chart shows the Cybersecurity ETF (CIBR), which I am showing instead of HACK because CIBR is slightly stronger. CIBR retraced around half of the November-February surge with a decline to 40. The ETF bounced and then fell back with a small falling wedge/flag. The candlestick chart shows that this flag retraced around 2/3 of the prior advance and a break above Monday’s high would be bullish.

The next chart shows the Video Games & eSports ETF (HERO) with a similar structure. HERO retraced 2/3 of the prior advance with a 20% decline, bounced around 30, fell back with a falling flag and broke the flag line (dot chart). This is the early signal that the correction is ending. The candlestick chart shows a channel break and then flat trading. A follow through break above the mid March high would be bullish.

Deep Correction, Lower low in March, Short-term Pop

PBW, IBB

The Clean Energy ETF (PBW) and Biotech ETF (IBB) are in a lower group because they forged lower lows from early March to late March. The first chart shows PBW with a falling wedge on the dot chart and a break above the upper line. The candlestick chart shows a hammer in early March and a test of the hammer low. There is also a bullish engulfing on Tuesday and short-term breakout on Thursday, as well as a StochRSI pop. The breakout is early days. Follow through with an RSI break above the mid March high and a price break above 110 are the next steps.

The Biotech ETF (IBB) chart shows similar characteristics: lower low in March, bounce off the early March low and RSI divergence. Note that a bullish divergence in RSI is rare when the bigger trend is up. In fact, this is pretty much the only situation when I would consider a bullish divergence: when it forms after a correction. A bullish divergence that forms after a 52-week low or below the 200-day is a non-starter. Ignore!

Also notice that RSI has a bullish failure swing working, which is a setup that is independent of price. There are five steps: RSI dips below 30, RSI bounces, RSI falls back, RSI holds above 30 and RSI breaks above its prior high. According to Wilder, creator of RSI, a break above the intermittent high completes the setup and this is the bullish signal. I have never tested this, but a higher low and breakout in RSI make sense.

Sharp Pullback from New High, Oversold

XLE, USO, XES, XOP, FCG, AMLP

Pullback from New High, Oversold

XLF, KRE

ETFs from here are lagging over the last few months or in downtrends. Note the gold and Treasury bonds are still the weakest of all right now.

Downtrend: IEF, TLT, GLD, GDX, SIL, SLV

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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