ETF Trends, Patterns and Setups – A Choppy Affair, More Uptrends than Downtrends, Breakouts Holding and Failing (Premium)

Watch out for rising correlation in the stock market. Selling pressure was concentrated in large-caps on Wednesday as S&P 500 Advance-Decline Percent (-78.2%) plunged to its lowest level since June 18th. I view the plus and minus 80% levels as significant because they represent 90% up/down days. Plus/Minus 80% means 450 or more of S&P 500 stocks advanced/declined (450/500 = 90%). Advance-Decline Percent is advances less declines divided by total issues (450 – 50 = 400 and 400/500 = 80%).

The S&P MidCap 400 SPDR (MDY) does a good job catching the current environment for the average ETF, stock or portfolio. MDY is very close to a 52-week high, but still below its April high and has nothing to show over the last four months. MDY broke out of a falling channel (bullish), but failed to hold this breakout after a sharp decline last week (cold feet). This breakout failure, however, did not last long as prices surged the last four days (bullish again – chop). It has been nothing but chop for MDY the last four months and this is also reflected in dozens of stock-related ETFs.

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

40% of Stock-Related ETFs in StochClose Downtrends

Of the 112 stock-related ETFs on the table, there are 65 active uptrends (58%) and 47 active downtrends (42%). There are still more active uptrends than downtrends, but the number of active downtrends increased by 1% this past week.

The Russell 2000 ETF (IWM), the S&P SmallCap 600 SPDR (IJR) and the Russell Microcap ETF (IWC) are in downtrends, while the S&P MidCap 400 SPDR (MDY), S&P 500 EW ETF (RSP), S&P 500 SPDR (SPY) and Nasdaq 100 ETF (QQQ) are still in uptrends. Large-caps are still leading with the highest StochClose values. SPY, QQQ and RSP recorded 52-week closing highs on Wednesday. This is why the 52-wk Range is at 100 (far right column). The StochClose values are in the mid to upper 90s because StochClose is smoothed with a 5-day SMA.

Ten of the eleven sector SPDRs are in uptrends with the Energy SPDR (XLE) being the only downtrend, and by far the weakest of the eleven sectors. Six sectors have StochClose values above 90 and are the clear leaders right now (XLK, XLC, XLV, XLP, XLU, XLRE). Of the other three large sectors, XLI, XLF and XLY have StochClose values above 80 and are still in long-term uptrends.

Overall, we can clearly see that the large-cap universe is doing just fine with the major index ETFs and 10 of the 11 sector SPDRs in uptrends. We see less strength in mid-caps (MDY) and outright weakness in small-caps and micro-caps. This is also reflected in the 47 ETFs that are in downtrends.

The next table section shows the most recent trend signals (within the last two weeks). This week we are seeing an uptrend signal in IPO (Bars = 2). We are also seeing downtrend signals in IJR, EWA, EWZ and AMLP. Keep in mind that trend-following signals are profitable around 40% of the time, but the gain/loss ratio is usually 2 to 1 or higher. Click here for more details on the StochClose strategies.

RSP Breakout Holds

The S&P 500 EW ETF (RSP) perked up the last six weeks with a bounce offa the range low and a consolidation breakout (blue shading). The ETF fell back to the breakout zone (throwback) and bounced the last five days with another new high on Wednesday. RSP represents the “average” stock in the S&P 500 and this new high bodes well. The August lows mark first support and a close below these lows would negate the breakout. Such a move would not reverse the uptrend, but would throw cold water on the breakout and possibly lead to a correction.

IWM Surges to Middle of Range

Traders and investors have a choice and choices are important when it comes to narrowing our focus. We can focus on all charts and look for any pattern or we can narrow our focus to charts with clear uptrends and focus only on our preferred bullish setups. The latter will make life a lot easier. The Russell 2000 ETF (IWM) is leading the market over the last five days, but I am not interested because it has gone nowhere since February-March and StochClose triggered bearish in mid July. StochClose is currently at 28.9 and this means there are plenty of ETFs with stronger charts out there, like SPY, RSP and QQQ.

The chart shows IWM breaking rising wedge support with a sharp decline in mid August and then surging right back above the support break this week. The surge seems impressive, but IWM is still in a downtrend and still a laggard. A move above the 50-day in a downtrend is more likely a mean-reversion setup (short-term bearish) because the bigger trend is down. Also note that RSI is in the 50-60 zone, which acts as momentum resistance when the bigger trend is down.

ETFs in this group are in steady uptrends with new highs recently. They are simply in the trend-monitoring phase so there is nothing to do except monitor. SPY and the Communication Services SPDR (XLC) set the tone for this group. The first chart shows SPY within a rising channel since November and a new high on Wednesday. The second chart show XLC with a steady uptrend and consistent bounces off the rising 50-day SMA.

The Residential REIT ETF (REZ) is the only one that is short-term oversold as RSI dipped below 50 and the ETF formed a small falling wedge. The blue arrows show when RSI previously dipped below 50. A wedge breakout would end the small correction and signal a resumption of the uptrend.

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

ETFs in this next group are also in uptrends, and also in the trend-monitoring phase, but they are quite extended after big runs from May to August. These ETFs are up between 10% (XLV) and 23% (IGV) over the last 70 trading days (14 weeks). The chart below shows QQQ with a 15% surge from mid May to mid July and then a zigzag advance into late August (blue dashed lines).  RSI briefly dipped below 50 last week and the ETF then zoomed to a new high the last five days. The next chart shows IGV with similar characteristics.

The next chart shows the Biotech ETF (IBB) surging some 23% and then dipping to the rising 50-day SMA as RSI became oversold last week. IBB surged on Monday with a gap and broke out of a falling wedge (see candlestick chart). StochRSI also popped above .80 for a bullish momentum pop.

In the weekend video (here), I noted some ETFs that were short-term oversold within bigger uptrends (around the 30min mark). Further in the video (36:30 mark), I highlighted some tech-related ETFs that were oversold in uptrends (SMH, SOXX, SMH, FDN, CIBR). Oversold conditions in long-term uptrends provide mean-reversion setups that can lead to bounces.

Oversold can be measured a number of ways. In general, I am looking for a two to four week pullback so my indicators are set accordingly. Oversold indications include an RSI(14) dip into the 30-50 zone, a price dip below the 50-day SMA or a Momentum Composite dip to -3 or lower. The Momentum Composite aggregates overbought and oversold signals in five oscillators. A -3 reading means three of the five oscillators are oversold. For now, you can read more about the Momentum Composite here at StockCharts. I will post an article and video on TrendInvestorPro later this month.

The first chart shows the Semiconductor ETF (SOXX) with a choppy uptrend since February-March. There were deep dips below the 50-day SMA in March and May, and then relatively shallow dips below the 50-day SMA the last few months. These dips/touches created short-term oversold conditions within the bigger uptrend and led to bounces. Most recently, the decline below the 50-day retraced 67% of the prior advance and there was a StochRSI pop on Monday (see candlestick chart lower left). This is bullish, but keep in mind that trading has been very choppy since July. Actually, trading has been choppy since March. Thus, don’t be surprise to see more choppy trading.

The next chart shows the Internet ETF (FDN) with a rather deep decline below the 50-day SMA in August. Also notice that RSI dipped to the 37 area. The bigger trend was still up so this decline was considered a pullback within a bigger uptrend. As noted in the weekend video, there was a StochRSI pop on Friday and this was the first sign that the pullback was ending. FDN followed through the last three days and the red line shows the ATR Trailing Stop for reference.

The next chart shows the Cloud Computing ETF (SKYY) with the Momentum Composite dipping to -3 last Tuesday-Wednesday and -4 last Thursday. This move triggered a short-term oversold condition within a long-term uptrend. The line chart (upper left) shows StochClose on a bullish signal. The red vertical lines on the bar chart show when the Momentum Composite initially hit the -3 or lower level. Oversold does not often mark the exact low, but it serves as an alert to watch price action closely for a momentum pop or upside catalyst. SKYY got its catalyst with the gap/surge on Monday. Medium-term, there is also a triangle breakout working.

Speaking of oversold bounces and triangle breakouts…the Nasdaq 100 Next Gen ETF (QQQJ) covers 100 stocks that have a chance to move into the Nasdaq 100. QQQ represents the top 100 and QQQJ represents the top 101 to 200. QQQJ has a higher beta and is generally riskier than QQQ. The chart shows QQQJ within a long-term uptrend (StochClose) and the Momentum Composite dipping to -3 last week (and lower). QQQJ popped on Monday and broke out of a triangle this week. This is a larger bullish continuation pattern or rest after the May-July surge. The breakout signals an end to the corrective period and a resumption of the bigger uptrend.

The triangle breakouts in SKYY and QQQJ are medium-term bullish, but risk at the beginning of the breakout always seems high. A stop-loss too tight risks a whipsaw and a stop-loss too wide risks a wider loss if triggered. With pattern trading, the initial stop-loss is usually placed just below the low of the pattern just before the breakout. In this case, we are talking last week’s low (red horizontal line near 32.5). With QQQJ already up 5% the last four days, this means a 6% loss on an exit. You know the drill … plan your trade and trade your plan.

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

The market is mixed even within certain sectors and industry groups. The Steel ETF (SLX) broke out, but did not hold its breakout and this weighed on the Materials SPDR (XLB). However, strength in other groups supported XLB as it held its breakout. The chart below shows XLB with a falling wedge breakout, a throwback to the breakout zone and a bounce off this zone. The August lows now mark support and a break here would negate the breakout.

The next chart shows the Home Construction ETF (ITB) with a falling wedge and breakout in late July. The ATR Trailing Stop was set 4 ATR(22) values below the highest close so it starts just below the pattern low (initial stop). This is a wider stop that will not be triggered with a little noise. However, the wider stop means the loss will be larger when triggered. ITB followed through after the breakout and this current stop is near the breakout zone (breakeven).

Channel Breakout late July


The DB Agriculture ETF (DBA) remains strong with a channel breakout in late July and choppy trading after the breakout. The breakout zone is largely holding and remains bullish. While a move below the 50-day SMA would negate the breakout, it would also set up the next mean-reversion opportunity.

The next ETFs have falling wedges and breakouts in early August. There were throwbacks to the breakout zone and these breakouts largely held. The Finance SPDR (XLF) clearly held its breakout, while the Agribusiness ETF (MOO) barely held its breakout zone because it did not close below early August low. This week’s bounces reinforce support from the August lows. A close below the August lows would negate the breakouts.  

The FinTech ETF (FINX) was on my radar when it pulled back after a 19% surge and then broke out in late July. Prices continued higher after the late July breakout and the ATR Trailing Stop (2 x ATR(22)) continues to hold. Sometimes this stop works like a charm. Other times it can be too tight and trigger with noise.  

ETFs in the next group broke out in late July, but fell sharply and failed to hold their breakout zones (green lines). They are not as strong as ETFs that held their breakouts zones. The long-term trends are still up and these ETFs are above their mid July lows. Perhaps the breakout failures are noise, but these ETFs are not leading the market after these failed breakouts.

Small Micro Caps: IJR, IWM, IWC

Energy-related: XLE, XES, XOP, AMLP, FCG

Copper, Uranium and Ag: COPX, CPER, URA, MOO


Clean Energy: PBW, ICLN, QCLN, TAN, FAN

Cannabis: YOLO, MJ

eSports and Betting:  HERO, ESPO, GAMR

Defense Aerospace Airline: XAR, JETS

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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