ETF Trends, Patterns and Setups – Overbought ETFs Get Hit, Long-term Breakouts Remain, Copper-Metals ETFs Set Up (Premium)

The broad market environment remains bullish with more groups participating over the last few weeks. Stocks were hit with a bond-market bombshell on Wednesday as the 10-yr Treasury Yield surged 9%. This sudden move spooked high-beta stocks, emboldened the Dollar and led to a big breakout in gold. Tech-related ETFs were hit the hardest, but they also had some of the biggest advances over the prior five weeks and were ripe for a pullback or rest. Overall, there are not many setups right now because of the sharp advance since early October. Many ETFs were quite extended and simply in the trend-monitoring phase. I am, however, noticing potential bullish setups in the copper and industrial metals ETFs as they fell back to their breakout zones. There is also a bull flag in XLU.

Broad Market ETFs

The broad market environment is bullish. SPY raced to a new high with a ~10% advance in five weeks and then fell back the last two days. The ETF is certainly entitled to a pullback after such a strong move. Overall, there is no change in the chart. The long-term trend is up, the falling wedge was the last setup and the wedge breakout was the last trigger. SPY is currently in the midst of an upswing within a bigger uptrend.

QQQ sports a chart similar to SPY with a falling wedge, breakout and surge to new highs. QQQ was up around 13% in five weeks and fell 2.3% the last three days. Techs and high flyers bore the brunt of selling pressure on Tuesday as the 10-yr Treasury Yield surged off its rising 200-day and back above 1.5%. At least that seems to be the excuse. As with SPY, QQQ earned the right to a pullback after the big run and the ETF remains bullish overall.

Equal-weights, mid-caps, small-caps and micro-caps all strengthened the last five weeks as the advance in stocks broadened. The S&P 500 EW ETF (RSP), S&P MidCap 400 SPDR (MDY), S&P SmallCap 600 SPDR (IJR) and Russell 2000 ETF (IWM) all hit new highs in November. The Russell Microcap ETF (IWC) remains short of a breakout though. The chart below shows IWM with a breakout in late October and surge in November. The ETF was up 4.25% in October and is up 4.08% so far in November.  Note, however, that SPY and QQQ still have stronger price charts and clearer uptrends. In any case, IWM remains with a bullish breakout and bullish chart. It too is entitled to a pullback after the move from 223 to 242 (27-Oct to 8-Nov).  

Long-term Uptrend, Short-term Extended, Hard Pullback


The tech ETFs led the market with double digit gains from early-mid October to early November. Most of the tech-related ETFs hit new highs this week and then fell back pretty hard on Wednesday. This is the nature of the beast: big runs create short-term overbought conditions and such conditions increase the chances for a corrective period. Predicting a correction or pullback within a bigger uptrend, however, is very difficult because the bigger uptrend is the dominant force at work. We will have much better luck trying to time the end of a pullback than the end of an upswing. In any case, there are no setups for the tech-related ETFs because they have yet to form short-term bullish continuation patterns or become short-term oversold.

The chart below shows the Software ETF (IGV) with a 15% gain in five weeks and a 2.9% decline on Wednesday. As far as managing a trade, short-term traders can consider profit targets and close half the position after a big run. A wide trailing stop could then be used for the remainder. Long-term traders can base exits on longer-term trend changes, such as a StochClose signal.

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

The Electric Vehicle ETFs were also part of the leadership group the last four to five weeks with double digit advances to new highs. The Autonomous EV ETF (DRIV) exceeded the upper line of the rising channel with help from its top five holdings (Tesla, Nvidia, Microsoft, Alphabet, Qualcom and Apple). These five account for around 23% of the ETF. The Global Auto ETF (CARZ), which is dominated by the legacy auto makers, advanced to the upper line of the rising channel and fell back the last few days. These two are in clear uptrends, but still short-term extended and I do not see a setup.

Uptrend, New High, Volatile


The Lithium Battery Tech ETF (LIT), Uranium ETF (URA) and Strategic Metals ETF (REMX) all corrected in the fall, broke out of short-term bullish patterns and hit new highs in November. There are no setups on the chart, but they are in clear uptrends and part of the leadership.

You can learn more about exit strategies in this post,
which includes a video and charting options for everyone.

There is no change in the banking ETFs, Regional Bank ETF (KRE) and Bank SPDR (KBE). Both formed long triangle consolidation patterns and these are bullish continuation patterns (rest within bigger uptrend). Both broke out in late September and extended higher the last six weeks. There is no short-term setup on the charts right now.

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

Next we get to the October breakouts, of which there are quite a few. These breakouts, as well as the late September breakouts above, show broadening participation in the bull market. These were the groups that lagged because they corrected when SPY and QQQ continued higher. They have now broken out and are contributing to the bull market. Most of these ETFs are also short-term extended after big runs the last five weeks (XLI +6.4%, IFRA +7.2%, XLB +10%).

The chart below shows the Infrastructure ETF (IFRA) with a bounce off the rising 200-day SMA in late September and early October. The ETF broke short-term resistance within the bigger falling channel and then broke out of the falling channel. IFRA is up over 7% in five weeks and getting short-term extended, which also means there is no setup right now. Nevertheless, the falling channel is a big corrective pattern and the breakout signals a continuation of the prior (58%) advance. I am not necessarily looking for another 58% advance though.

ETFs in this next group also have multi-month consolidation patterns and breakouts, but they have yet to hit new highs and are not as strong as ETFs that already hit new highs. The first chart shows the Home Construction ETF (ITB) finding support near the rising 200-day as a large triangle formed. The ETF broke out of the triangle with a 15% advance in five weeks. The breakout is clearly bullish because it signals an end to the correction and a resumption of the bigger uptrend. However, ITB is short-term extended and I do not see a setup right now.

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

The Clean Edge Green Energy ETF (QCLN) and Solar Energy ETF (TAN) also sport multi-month corrective patterns and breakouts. The overall price charts are different because these two fell sharply from mid February to mid May, bounced and then formed their multi-month triangle/wedge. The first chart shows QCLN breaking out and surging over 30% in five weeks. The breakout is clearly bullish and strong, but the ETF became very extended and fell 4.74% the last two days. I do not see a setup right now and will just wait for a bullish continuation pattern or short-term oversold condition to materialize.

ETFs in this next group hit new highs in early September, pulled back into early October and broke out in mid October. All extended on their breakouts, but have yet to hit new highs, though some are very close. The Healthcare SPDR (XLV) and Medical Devices ETF (IHI) feature here, as well as the REIT-related ETFs (XLRE, IYR, REZ). Again, the setups were in the first half of October and there are no setups right now. Just uptrends. These ETFs are currently in the trend-monitoring phase.

The Natural Gas ETF (FCG) is one of the best performing energy related ETFs since late August. The ETF surged some 52% and then stalled with what looks like a flat flag. FCG fell sharply with the rest of the market on Wednesday, but remains within the flag. Even though a flag after a sharp advance is a bullish continuation pattern, it is a small pattern and I think the chances of whipsaw are high if playing a breakout. The better play might be a short-term oversold condition and dip to the rising 200-day.

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.

The Oil & Gas Equipment & Services ETF (XES) is not as strong as XLE, XOP and FCG because it did not record a new high. XES still has a breakout working and is near the rising 200-day with a small wedge taking shape. A break above 60 would reverse the wedge and signal a continuation higher.

Here is a CNBC video with Kelly Evans and Damien Courvalin, head of energy research at Goldman. Basically he notes that demand for natural gas is transitory, while demand for copper and oil is not.

The Copper ETF (CPER), Copper Miners ETF (COPX) and DB Base Metals ETF (DBB) remain in potential reversal zones and with bullish setups working. CPER and COPX broke out of a large falling wedge/channel with a strong advance in mid October. They fell back hard into early November with moves back to the breakout zones. The chart below shows CPER retracing 2/3 of the October surge with a decline to the 26-27 area. Broken resistance zones turn into support and a 2/3 retracement is normal for a pullback within a bigger uptrend. Short-term, the ETF firmed the last few days and established short-term resistance with Monday’s high. A break out here would reverse the pullback and be bullish.

The charts for the Copper Miners ETF (COPX) and DB Base Metals ETF (DBB) highlight the difference between chart analysis and systematic signals using StochClose. Note that StochClose remains bearish for COPX and recently turned bearish for DBB. However, a look at the DBB chart shows a new high just a month ago and price above the summer lows. The recent decline was sharp enough to push prices into the lower half of the six month range (mid March to mid November) and this is why StochClose (125,5) broke below 40 (downtrend signal). There is no such thing as the perfect indicator setting and all trend indicators generate whipsaws at some point. This does not mean that these systematic signals are ineffective when using a Trend-Following Strategy. Whipsaws are expected and they occur 60% of the time. On the price chart, DBB is in a potential reversal zone and mildly oversold (Momentum Composite hit -2). Watch for break above this week’s high.

Here is link to a great commodity price table at Yahoo Finance. This includes stock index futures, bond futures and commodities.

The Aerospace & Defense ETF (ITA) and Metals & Mining SPDR (XME) also have consolidation breakouts working, but follow through was more tentative and they did not exceed their August highs. The breakouts are still holding and the cup remains half full. The chart below shows XME working its way higher since late September 20th and breaking the upper line of the triangle. I would stay bullish here as long as XME holds 42 (200-day SMA). Note that there is concern because the Steel ETF (SLX) is much weaker and XME is 43% steel. SLX, however, has more non-US stocks with RIO and VALE accounting for 29% of the ETF.

It is hard to tell if the Utilities SPDR (XLU) is coming or going because the current price is pretty close to the levels in mid November 2020 and StochClose is all over the place. There appears to be an upward bias since March with a new high in August and short-term breakout in mid October. XLU fell back the last few weeks and formed a possible bull flag. Watch for a breakout to signal a continuation higher.

The Biotech ETF (IBB) and Biotech SPDR (XBI) are doing what biotechs do best: trade all over the place. These two were in the spot light three weeks ago as IBB firmed near the 67% retracement and the Momentum Composite was oversold. The ETF broke out with a surge above 165 and then plunged below 155 the last six days. Moderna (-34.3%) and BioNTech (-18.7%) get most of the blame with outsized declines after earnings. Short-term, there is a rising (bear) flag from early October and the breakdown argues for a move towards the spring lows. This is indeed the base case. The green lines still define a volatile rising channel and uptrend overall. Thus, an oversold condition in the coming days or weeks would still provide a bullish mean-reversion setup.

The next chart shows the Biotech SPDR (XBI) with lots of support in the 120 area and a short-term breakout last week. The ETF fell sharply the last five days and moved below the breakout zone. The blue lines mark the upswings and the downswings. A break below the trendline extending from August would reverse this upswing and call for a reassessment.

The Steel ETF (SLX) and the Global Timber Forestry ETF (WOOD) are not partaking in the October-November surge. Both are part of the Materials sector and XLB hit a new high. I viewed the declines from May to September as corrections after massive advances, but they just kept correcting. The $1 million question: when does a correction turn into a long-term downtrend? It is hard to say, especially when the prior advances were quite large (128% for SLX and 54% for WOOD). Nevertheless, it is clear that SLX and WOOD are laggards right now. The chart below shows SLX breaking the summer lows, bouncing with a rising (bear) flag and breaking flag support. The October highs mark resistance and a breakout is needed to get SLX back on the bullish track.

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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