ETF Trends, Patterns and Setups – Oversold Bounces and Gap Galore, Banks and the Yield Curve, QQQJ Channels Feb-Mar (Premium)

Stocks went from the edge of the abyss last week to a renewed bull market this week. Well, perhaps not so fast there cowboy. The price action over the last few days is certainly bullish because SPY broke out with a three day move accompanied by strong Advance-Decline Percent (see Wednesday’s commentary for details). Dozens of ETFs also broke out with gaps and big moves the last few days and we will focus on these in today’s report. The focus is on ETFs that held up the best during the decline from late November to early December. ETFs that broke their October lows (XLC) or those that experienced outsize declines (QCLN) are in the avoid group. The Nasdaq 100 Next Gen ETF (QQQJ) and Software ETF (IGV) are at the end of this report because of their outsized declines.

While this is a subjective assessment, note that the chances of whipsaw on these short-term breakouts seems above average. Volatility increased over the last few weeks and we could see this continue as the Fed meets next week (Ugh!). While short-term breadth looks good on the breakout, there were longer term bearish breadth thrusts in early December and the percentage of stocks above the 200-day SMA has been deteriorating since summer. Stay nimble and selective.

New Highs and Leading


ETFs in this first group are leading because they recorded new closing highs this week. There are no setups on these charts, just strong uptrends. The CandleGlance charts show these with the 200-day and Full Stochastic (125,5,1), which can be used as a proxy for StochClose (125,5). Six of the eight have been in uptrends the entire year. The Home Construction ETF (ITB) and Homebuilders ETF (XHB) experienced deeper dips that pushed Full Stochastics below 40. Both recovered with the indicator moving above 60 in late October for XHB and above 60 in early November for ITB. You can read more about StochClose in the seven part series on the Premium Page.

Modest Pullback after New High in November


ETFs that pulled back with the market over the last few weeks and did not become oversold held up better than ETFs that did become oversold. The Strategic Metals ETF (REMX) hit a new high in late November and pulled back in early December. The Momentum Composite dipped to -1 and did not become oversold (-3 or lower). This is a relatively shallow dip and shows REMX holding up relatively well. I do not see much in the way of a short-term setup, but the ETF is getting a bounce off a support zone.

The next chart shows the DB Agriculture ETF (DBA) with a new high and sharp decline in late November. The Momentum Composite did not turn negative during this decline and did not become oversold. DBA hit a big support zone marked by the prior resistance zone and bounced in early December. I do not see a short-term setup on this chart. DBA is in an uptrend and one of the leaders.

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

ETFs in this next group hit new highs in November, became oversold in early December and bounced this week. The first chart shows the Lithium Battery Tech ETF (LIT) with a new high in November and a pullback that became short-term oversold last week (red arrow). LIT bounced with the market the last two days, but StochRSI did not pop above .80. I would not view this as a negative because Wednesday’s bounce was strong.

The next chart shows the Autonomous EV ETF (DRIV) with a new high, pullback, oversold condition and gap-breakout on Tuesday. Again, StochRSI did not pop above .80, but there is clearly a gap-breakout on the chart. StochRSI is just one way of measuring a short-term momentum pop after a pullback. Chartists can also use short-term chart resistance, candlestick patterns or gap-breakouts to identify a short-term momentum pop after a pullback. The green zone marks the gap zone and a strong gap-breakout should hold. A close below 30 would call for a short-term re-evaluation. As noted above, I think the chances of whipsaw are above average. Note that short-term whipsaws would not affect the bigger uptrends.

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.

Lets check on oil before we look at the energy-related ETFs. The chart below shows West Texas Intermediate ($WTIC) becoming oversold for some four weeks as it fell towards the August low. WTIC found support just above the August low and surged the last five days. The lower chart shows the DB Energy ETF (DBE) breaking short-term resistance on Monday. WTI and DBE are in long-term uptrends and the recent bounces reversed their short-term downtrends (pullbacks within the bigger uptrends).

The next chart shows the Oil & Gas Exploration & Production ETF (XOP) with a pullback that evolved into a falling flag and retraced half of the prior (50%) advance. XOP broke out of this flag with a surge on Tuesday. Traders playing this breakout can consider two stops. First, a close below Monday’s close would fill the gap and negate the breakout. Second, the short red line shows the ATR Trailing Stop, which is 2 ATR(22) values below the highest close since the breakout. This stop is wider and a close below 93.70 would trigger it.

The next chart shows the Oil & Gas Equipment & Services ETF (XES) bouncing off support with a short-term breakout and StochRSI pop. A close below 49.50 would fill Monday’s gap and a close below 47.99 would trigger the ATR Trailing Stop.

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

As noted above, there are dozens of ETFs with short-term pullbacks into early December and breakouts this week. The chart below shows the Materials SPDR (XLB) with a big channel breakout in October, a new high in mid November and a pullback into early December. XLB became oversold, formed a falling flag of sorts and broke out. As with the others, the breakout is bullish until proven otherwise. Note that a failed breakout would be a short-term issue, but not enough to reverse the bigger uptrend.

The Healthcare SPDR (XLV) sports a short-term breakout within a bigger bullish consolidation. First, the dotted lines show a larger triangle consolidation taking shape after the September high. This is a consolidation within an uptrend and deemed a bullish continuation pattern. Second, XLV pulled back with the rest of the market the last few weeks and broke short-term resistance with a surge the last two days. This increases the chances of a bigger triangle breakout in the 135 area.

The next chart shows the Medical Devices ETF (IHI) with a wedge type correction after a 22% advance. This wedge retraced around half of the prior advance and represents a pullback/consolidation within a bigger uptrend. IHI broke short-term resistance with a gap-surge on Tuesday.

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

I am going to skip the Industrials SPDR (XLI) because the industrials sector has some messy bits, among its market-cap weighted 73 component stocks. The Airline ETF (JETS), Aerospace & Defense ETF (ITA), Honeywell (HON), General Electric (GE) and Boeing (BA) are down since October and seriously lagging. The Infrastructure ETF (IFRA) has 150 equally weighted stocks from three sectors: industrials, materials and utilities. IFRA is still bit unruly, but there are no airlines or aerospace-defense stocks.

On the price chart, IFRA broke out of a big channel and hit a new high in November. The ETF pulled back rather hard with a 67% retracement and became oversold as the Momentum Composite hit -5 two days straight. IFRA broke out on Monday.

ETFs in this next group hit new highs in November and pulled back with the rest of the market into early December. Their pullbacks were rather sharp in terms of the price decline. All three are in uptrends overall and held their October lows, which means they held up better than ETFs that broke their October lows. The first chart shows the Cybersecurity ETF (CIBR) with a steep 12% decline and oversold conditions into early December. The ETF gapped up on Tuesday and StochRSI popped above .80 so a breakout is in the works.

Before talking about the banks, we must address the elephant in the room. The yield curve is flattening as short-term rates rise faster than long-term rates. The chart below shows the 3-month (.07%), 1yr, 2yr, 5yr, 10yr and 30yr (1.87%) Treasury yields in the top window. The 2-yr Treasury Yield ($UST2Y) rose sharply from early September to early December (red line) It is still below its January 2020 levels, but quickly moving toward pre-pandemic levels (normalcy). The first indicator window captures the flattening yield curve as the difference between the 10yr and 2yr narrows and the lower window shows the Regional Bank ETF (KRE) flat since March.

I should also note that the bond market is a right mess and the Fed meets next week. Anyone remember December 2018? I will leave Fed analysis, inflation and such to other pundits and stick with the 10-yr Treasury Yield chart, even though it is messy. Note that the 10-yr Treasury Yield hit resistance in the 1.7% area and October-November and broke below 1.4 last week. This reversed the upswing from July to November. The yield bounced this week, but so far this is just an oversold bounce.

The alternative setup is bullish. There is a large bullish pattern at work and a breakout at 1.7 would argue for a move towards 2%. After a huge advance (.50 to 1.75), the yield retraced 50% and could be forming a triangle. This is why a breakout at 1.7 would be bullish for the 10-yr Treasury Yield and bearish for Treasury bonds. Note that yield should move back to pre-pandemic levels at some point this century.

The Regional Bank ETF (KRE) would love to see a breakout at 1.7, but it has yet to happen. Also keep in mind that we need to take KRE signals from the KRE chart, note the 10-yr Treasury Yield chart. KRE remains in an uptrend with a new high in November. The ETF fell back with the rest of the market in early December, but did not really bounce this week. A break above short-term resistance (red line) and/or a StochRSI pop would be short-term bullish here.

The Oil & Gas Equipment & Services ETF (XES) was featured with the energy group earlier so I will only cover the Biotech ETF (IBB) and the Metals & Mining SPDR (XME) here. The first chart shows XME with a possible Ascending Triangle, which is a bullish continuation pattern. XME became oversold as it fell to a support zone and bounced the last two days. There is a short-term breakout and StochRSI pop working.

The Biotech ETF (IBB) is also bouncing off support, but a much different support zone (the spring lows). IBB has gone everywhere and nowhere in 2021, after a 30% advance in 2020. The ETF became oversold near support on Friday-Monday and surged the last two days with a StochRSI pop.

The Copper Miners ETF (COPX) is stronger than CPER because it is trading above its 24-November close and recovered all of the Black Friday decline. The pattern is the same as with CPER, but COPX sports a breakout with the surge on Tuesday. Copper needs to follow suit quickly or this breakout could fail.

The DB Base Metals ETF (DBB) is similar to copper with the surge, new high and hard throwback. There is a lot of support in the 20-21 area and I am watching for the next breakout (above the late November high). DBB is equal parts copper, aluminum and zinc, and you can chart futures prices for all three commodities at TradingView (affiliate link here).

ETFs with the biggest declines (>10%) in November produced some of the biggest bounces over the last two days. Using the Nasdaq 100 Next Gen ETF (QQQJ) as a proxy for the high-beta Nasdaq stocks, we can see a 10% decline from mid November to early December. This is the sharpest decline since April-May. Prior to April-May, the ETF fell 12% in February-March and this led to a consolidation into early May. My concern now is that the sharp November decline is destabilizing and we may need a few months to stabilize (trading range or correction).

Chart-wise, QQQJ tested the summer-fall lows and became oversold from November 30th to December 6th (red arrows). QQQJ gapped up on Tuesday, broke a steep trendline and StochRSI popped above .80 for a short-term momentum thrust. This is bullish price action, but the ETF is up around 5% the last two days (closing prices). A strong breakout should hold and a close below 33 would negate the breakout.

The next chart shows the Software ETF (IGV) with a 13% decline and break below the October low. The ETF became oversold from 22-Nov to 3-Dec and bounced with a gap-surge the last two days. This is bullish short-term price action as long as the gap holds.

Note that I will analyze more of the high-beta ETFs on Friday. These include QCLN, ICLN, TAN, ESPO and 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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