ETF Trends, Patterns and Setups – New Trend Signals, RSI(14) versus the Momentum Composite, Failed Breakouts Lead to Bigger Consolidations (Premium)

There were several new uptrend signals this past week and these signals suggest a stronger risk appetite in the stock market. Today’s report will review the StochClose indicator and some of these new trend-following signals. We will also show these signals on the revamped Ranking and Trend Table. Today’s charts also use the Momentum Composite more and I will show how it differs with RSI(14). Let’s go…

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

Ranking and Trend Table

The number of active uptrends expanded with some of the high flyers returning to bullish signals. Of the 112 stock-related ETFs on the table, there are 74 active uptrends (66%) and 38 active downtrends (34%). The number of active uptrends increased dramatically with the addition of five ARK ETFs (PRNT, ARKF, ARKQ, ARKK, ARKW), two clean energy ETFs (QCLN, FAN) and the S&P SmallCap 600 SPDR (IJR). Note that the Russell 2000 ETF (IWM) remains in a downtrend and is weaker than IJR.

As you can see from the table cutout above, there are some changes to the Ranking and Trend Signals table. First, I added a rank column to make it easy to rank ETFs by their StochClose values and see the top 20. Second, I added some color coding Up (uptrend) and  Down (downtrend).  Third, I added a color to easily identify the new trends. NewUp for a new uptrend within the last five trading days and NewDown for a new downtrend within the last five trading days. The Trend RSI column shows ETFs that were either in uptrends and oversold (UpOS) or in downtrends and overbought (DnOB) within the last three days. RSI is oversold when in the 30-50 range and overbought when in the 50 to 70 range. I am really only interested in oversold conditions when the bigger trend is up (StochClose signal).

The entire table is based on the Core ETF List, which has 128 ETFs currently. I also added a column for the All Weather ETFs (Column 1 for AllW). Using the search box at the top-right, you can type in AllW to see only ETFs that are part of the All Weather List, which has 50 ETFs. Users can also sort any column by clicking the heading. Users can sort two columns by holding the shift key, clicking a column heading for the first sort and then clicking another heading for the second sort. For example, hold shift, click AllW and then click Rank to see the All Weather ETFs sorted by the rank column. The rank numbers still apply to the Core List, but the order is the same. The Medical Devices ETF (IHI) is the highest ranked AllW ETF and the Gold Miners ETF (GDX) is the lowest.

SPY Extends Trend as RSP Holds Breakout

The S&P 500 SPDR (SPY) extended its uptrend with a new high on Monday and remains within a clear rising channel. There is still some room to run before hitting the upper line (low 460s). This is not a hard target though. Short-term, the ETF bounced near the rising 50-day SMA on August 19th and is up almost 3% the last two weeks.

The indicator windows show RSI(14) and the Momentum Composite. Notice that RSI dipped into the oversold zone (30 to 50) at least seven times this year. In comparison, the Momentum Composite dipped to -3 just twice and to -2 once (June). -3 is my preferred level for an oversold setup or alert. RSI(14) is more sensitive and provides more setups, while the Momentum Composite is less sensitive and provides fewer setups. RSI(14) works great in a channel with shallow pullbacks. The Momentum Composite works better for choppy price charts and deeper pullbacks.

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 (20) is oversold below -3 and overbought above +3. Normalized ROC is the 20-day absolute price change divided by ATR(20). -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.

Average SPX Stock Performing Well

The S&P 500 EW ETF (RSP) equalizes the market cap effect in SPY because it is an equal-weight ETF. This means it represents performance for the average stock in the S&P 500. And performance is good. RSP broke out of a sideways consolidation in late July, held this breakout with a throwback in mid August and hit a new high recently. RSP shows us that strength and leadership extend beyond the large-caps in the S&P 500.

QQQ Leads with Surge and New High

QQQ is up around 5% the last two weeks and leading the market with another new high. The indicator window shows RSI(14) dipping just below 50 on August 18th to setup for a mean-reversion bounce. The Momentum Composite only reached -2 because the dip was relatively shallow.

StochClose (125,5) is a trend-following indicator and its signals are typical for most trend-following indicators. First, signals lag because and uptrend signals after a decent bounce. Second, around 40% of signals are successful (profitable), which means 60% fail or lead to a loss. Third, the average gain from the wins is typically three times or more the average loss. Fourth, we never know which signals will result in a strong uptrend (big gain) and which will result in a loss. There is no prediction involved, just following that signals.

There are several new StochClose signals so now is a good time to review the indicator and the signals. StochClose (125,5) is the 5-day SMA of the 125-day Stochastic Oscillator based on closing prices. The chart below shows IJR with the most recent 125-day period highlighted in blue. The green lines show the mid point of this range (50%). Just above is the 60% line, which corresponds to 60 for 125-day StochClose. A move above 60 puts price decidedly in the upper half of this range and this is deemed an uptrend signal. Conversely, a move below 40 puts price decidedly in the lower half and this is deemed a downtrend signal.

The chart in the upper left shows StochClose moving above 60 to trigger bullish. This follows a bearish signal on August 20th, which resulted in a whipsaw. Whipsaws are unavoidable in a trend-following strategy and represent the cost of doing business. The current bullish signal remains in force until proven otherwise (StochClose cross below 40).

The stock market advance from the covid low (March 2020) to the momentum peak (February 2021) was extraordinary with several momentum leaders advancing over 200%. A big advance often warrants a big correction and these ETFs fell 20+ percent from their February highs. There were StochClose bearish signals in March-April-May 2021 and the ARK ETFs languished for several months. These ETFs are now perking back up with StochClose bullish signals over the past week. Again, we do not know if these signals will lead to an extended uptrend and profit or a whipsaw and loss. Trend-followers to not place odds on their signals. They simply follow the trend and apply their rules.

The chart below shows the ARK Innovation ETF (ARKK) advancing some 350% from March 2020 to February 2021 (upper left window). StochClose triggered bearish on March 26th and then bullish on August 30th. A big falling wedge formed as the ETF fell below its 200-day and retraced around half of the 347% advance. ARKK broke out of the wedge in early June and then toyed with its 200-day. On the bar chart, a triangle formed in July-August and price broke out of the triangle this week. This breakout is bullish as long as the August low holds.

Note that the ARK ETFs, UFO, QLCN and FAN have above average volatility (risk). This means traders/investors implementing a trend-following strategy should consider appropriate position sizing to spread the risk. A 7% position in the ARKK is not the same as a 7% position in the Industrials SPDR (XLI), which has a lower volatility profile. I used 7% because my research shows that 14 ETF positions is optimal (100%/14 = 7.14%).  With a much higher risk/return profile, ARKK would warrant a smaller position size, perhaps by half or a third.

The next charts show the ARK Fintech Innovation ETF (ARKF) with a wedge breakout, a triangle breakout and a StochClose bullish signal. The ARK Autonomous Tech Robotics ETF (ARKQ) and ARK Next Gen Internet ETF (ARKW) have similar setups.

The next chart shows the Space ETF (UFO) with a large triangle consolidation above the rising 200-day SMA (upper left). StochClose triggered bearish on August 19th and then back to bullish this week for a classic whipsaw. Overall, the triangle looks like a big consolidation within an uptrend and this favors an upside breakout. On the bar chart, we can see a breakout within the triangle as UFO surged on news that the new iphone could support a satellite connection.

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

ETFs in this first group are in strong and steady uptrends. The only setup at work is a short-term consolidation in the Pet Care ETF (PAWZ). The ETF hit a new high in early August, corrected with a triangle into mid August and broke out in late August. Notice that RSI dipped into the oversold zone several times for a mild oversold reading. The Momentum Composite only reached -1 on August 11th, which means only one indicator became oversold.

ETFs in this group are also in strong uptrends and getting extended after big moves since May. The chart below shows the Healthcare SPDR (XLV) with a small triangle forming the last two weeks, and I do mean small. This is not a real pullback because RSI did not get near 50 and the Momentum Composite did not turn negative. Personally, I prefer setups with some sort of oversold condition.

The Materials SPDR (XLB) and Home Construction ETF (ITB) formed falling wedges into July, broke out in late July and held these breakouts. The first chart shows XLB with a successful throwback into mid August and bounce the last two weeks. This reinforces the August lows and the breakout remains valid (bullish) as long as these lows hold.

The next chart shows the Home Construction ETF (ITB) with a wedge breakout and the ATR Trailing Stop set 4 ATR(22) values below the highest close since the breakout. I used 4 as the ATR multiplier to position the initial stop just below the wedge low (pattern low). This gives enough wiggle room to absorb a little noise or volatility, and trail higher should prices advance.

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

There is no change in the DB Agriculture ETF (DBA) because it broke out in late July and is holding its breakout. Trading turned choppy after the breakout, but this is just noise within the bigger uptrend.

ETFs in this next group also have breakouts that are holding, to varying degrees. Again, the early August lows held after throwbacks in mid August and these ETFs bounced the last two weeks. The August lows now hold the key to the success or failure for these breakouts.

Sometimes trying to find a pattern on a price chart is futile and we must just accept a volatile uptrend. This is the case for the Autonomous EV ETF (DRIV) and Self-Driving EV Tech ETF (IDRV). DRIV broke out of a triangle consolidation in late May and then worked its way higher with a choppy channel the last three months. IDRV broke out of a choppy consolidation in early June and price action remained choppy after the breakout. Choppy price action reflects some chaos within the ETF and points to performance differences among the component stocks. The ETFs are still in uptrends, but finding patterns is quite difficult. In such situations, I think the Momentum Composite can come in handy because it can identify some true oversold conditions or pullbacks within a choppy uptrend. Notice how it dipped to -3 or lower in May, July and August. Oversold dips provide lower risk entry points during choppy uptrends.  

ETFs in this next group are still in uptrends, but they formed lower highs in August and bigger consolidation patterns. Trading in these ETFs has also been quite choppy and this is better suited for the Momentum Composite. The first chart shows the Global Auto ETF (CARZ) forming a big triangle within an uptrend. The Momentum Composite dipped to -4 and this marked a near-term low. Note, however, that oversold readings (-3 or lower) do not usually mark the exact low.

The next chart shows the Steel ETF (SLX) with a  long triangle consolidation since the May high. There were two oversold readings for the Momentum Composite during this period and several RSI(14) dips into the oversold zone.

The last charts show the Agribusiness ETF (MOO) and DB Base Metals ETF (DBB) with new highs in May and a consolidations into early September. Resistance breakouts would signal an end to the consolidations and a resumption of the bigger uptrends. Upside breakouts in CARZ and SLX could also be bullish.

Small Micro Caps: IWM, IWC

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

Industrial-related: XAR, JETS

Copper, Gold, Uranium: COPX, CPER, GDX, SIL, URA

Clean Energy: PBW, ICLN, TAN

Cannabis: YOLO, MJ

eSports and Betting:  HERO, ESPO, GAMR

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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