ETF Trends, Patterns and Setups – Another Rotation, Groups with Corrective Patterns, IWM Bounces off Support (Premium)

Is the market poised for another rotation? I posed this question last Friday with analysis of the 10-yr Treasury yield, which fell sharply from mid May to mid July (1.7 to 1.2 percent). During this time, SPY continued its grind higher and tech-related ETFs surged with double digit advances. During this two month stretch, money moved out of ETFs related to industrials, finance, materials, housing and energy. The chart below shows five tech-related ETFs with double-digit advances and five old economy ETFs with declines during this period (XLK, QQQ, IGV, CIBR, SOXX, IFRA, XLB, XME, KRE, XES, COPX).

While the decline in the 10-yr yield is not the only factor at work in the markets, there is clearly a correlation at work here recently. The chart below shows the 10-yr Yield ($TNX) and Regional Bank ETF (KRE) falling from mid May to July. Meanwhile, the Technology SPDR (XLK) advanced sharply during this timeframe.

The 10-yr yield and KRE are testing their rising 200-day SMAs and both have falling channels working. A channel breakout in the 10-yr yield would put a different dynamic at work in the markets and this could be bullish for the old economy ETFs. I would not consider this outright bearish for tech-related ETFs, but such a signal could kick off another rotation within the stock market.

We cannot predict the future, but we can consider the odds that an event will happen. Most months, I would not be too concerned with the odds of a whipsaw due to broad market weakness or volatility. However, August and September are historically the weakest months of the year. SPY is in an uptrend, but participation in that uptrend narrowed over the last few months. I would also note that SPY has not experienced a pullback greater than 5% since October, almost nine months ago.

As such, I think the odds are greater than 50% that we will see a correction greater than 5% in the next two months. Timing corrections/pullbacks in a bull market is probably the most difficult call of all. I have yet to get a signal that a correction is upon us, but I am watching three breadth indicators for clues and will cover these tomorrow. We are seeing lots of correction patterns (wedges/channels/flags) and even some breakouts. These setups and signals are bullish, but a correction signal would increase the chances of whipsaw or loosing trade. Plan your trade and trade your plan!

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

New High late July, Tight and Steady Uptrend

SPY, XLC, XLV, XLRE, IYR, REZ

ETFs in this first group are leading the market with new highs in late July and steady uptrends over the last few months. They formed tight rising channels of sorts with minor dips and higher highs. The first chart shows the S&P 500 SPDR (SPY) bouncing off its rising 50-day SMA for at least the sixth time since early February. The indicator window shows RSI dipping into the oversold zone at least six times as well. These dips gave way to bounces and new highs in SPY. SPY hit another new high this week and is at the upper end of its tight range. There is nothing to do here except monitor the uptrend and wait for the next setup.

The Healthcare SPDR (XLV) is another leader with a push to new highs again this week. The ETF stalled in May as RSI dipped into the oversold zone. XLV continued its uptrend with a pop in early June and is now at the top of the rising channel on the line chart (upper left). XLV is also in the trend-monitoring phase.

New High late July, Wide and Choppy Uptrend

QQQ, XLK, XLY, IHI

ETFs in this group are also in strong uptrends and leading with new highs in late July. The swings in these ETFs are a little wider, which makes their uptrends choppier. They are also in the trend-monitoring phase, which means there are no setups on the charts right now. The chart below shows QQQ with the setup and breakout in mid May. The ETF is up over 15% from its mid May low and quite extended. A pullback to the rising 50-day SMA and RSI dip in the oversold zone (30-50) could lead to the next setup.

New High late July, Extended IGV, FDN, CIBR

ETFs in this next group are also leading with new highs in late July. These ETFs formed big triangles from February to May and broke out of these triangles in mid June. These triangle breakouts are long-term bullish, but the ETFs are quite extended short-term after double-digit moves the last ten weeks or so. As with QQQ, a pullback to the rising 50-day SMA and/or RSI dip in the oversold zone could lead to the next setup.

Triangle Breakout, Short of New High

IBB, SKYY

The Biotech ETF (IBB) and Cloud Computing ETF (SKYY) also formed big triangles from February to May and broke out with strong moves in June. These two did not record 52-week highs in July so they are not quite as strong as the ETFs above. The chart below shows IBB pushing to a multi-month high on Wednesday as it extends further on its mid June breakout and StochRSI pop from July 20th.

New High mid July, Wide and Choppy Uptrend

SOXX, SMH

The two large-cap dominated semiconductor ETFs look the same: both are in choppy uptrends with rather wide swings. They hit new highs in mid July and are largely holding above their 50-day SMAs since mid June. The chart below shows SOXX with the choppy channel. The candlestick chart shows a surge and five day stall, which captures the essence of a bull flag. A breakout above these highs would signal a continuation higher.

The Dividing Line for Performance

Now we get to the ETFs that corrected in some way shape or form over the last one to three months. These ETFs hit new highs in May or June and then fell back with falling wedges (XLF), falling channels (IHF), sharp declines (XLE) or undefinable pullbacks (CPER). Some are breaking out and some are just short of breakouts, which puts them at their moment of truth.

New High in June, Falling Channel/Wedge

XLF, IGN, KBE, KRE, URA

The first chart shows the Finance SPDR (XLF) with a new high in June and falling wedge the last 7-8 weeks. This pattern is typical for a correction within a bigger uptrend. A break above the July highs would end this correction and signal a continuation higher. The candlestick chart shows a surge and five day stall that looks like a bull flag. A breakout at 36.90 would be bullish here.

The next chart shows the Regional Bank ETF (KRE), which was featured last Friday (along with gold). KRE hit an intraday high in March and a closing high in June. The ETF corrected with a steeper decline and a falling channel that retraced 1/3 of the prior advance and returned to the rising 200-day. A break above the mid July highs (65) would end this correction and signal a continuation of the bigger uptrend.

New High in May, Sharp Wedge Correction, Breakout Attempt

XLB, ITB, XHB

The Home Construction ETF (ITB), Homebuilders ETF (XHB)  and Materials SPDR (XLB) have falling wedge corrections and breakouts working as they surged the last seven days. The first chart shows ITB with a wedge that retraced around half of the prior advance and came close to the rising 200-day. The ETF broke the upper line and 50-day SMA with the seven day surge. There was also a StochRSI pop on July 20th, which is the early bird signal. The short red line shows the ATR Trailing Stop for reference and a close below this level would warrant a re-evaluation.

The second chart shows the Materials SPDR (XLB) with similar characteristics.

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

New High in May, Correction, Breakout Attempt

COPX, CPER, SLX, XME, DBA

ETFs in this next group come from the commodity complex: copper, steel and agriculture. These ETFs also scored new highs in May, corrected into July and surged the last seven days. They are attempting to break out, end their corrections and resume their bigger uptrends. I featured the Copper ETF (CPER) last week and the ETF broke out with a big move. The chart below shows the Copper Miners ETF (COPX) with a new high in May, a falling wedge into July and a surge above the wedge line this week. This surge is also off the rising 200-day SMA and RSI broke back above 50. The short red line shows the ATR Trailing Stop for reference.  

The next chart shows the Steel ETF (SLX) breaking out of a falling channel and exceeding its mid July highs. ETFs trading above their mid July highs are showing short-term relative strength.

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

New High in May, Falling Channel Correction, Breakout Attempt

IHF

The Healthcare Providers ETF (IHF) is also attempting to break out from a falling channel. The initial breakout occurred in early July, but the ETF stalled in the breakout zone with choppy trading. The sharp decline on Monday, July 19th, even triggered the ATR Trailing Stop. IHF rebounded the very next day and the breakout is still working. I re-added the ATR Trailing Stop for reference.

New High in May, Choppy Correction Since

CARZ, DRIV, IDRV, IGN

The electronic vehicle ETFs (CARZ, IDRV, DRIV) and the Networking ETF (IGN) surged in May and hit new highs in June (closing basis). They then fell back with choppy pullbacks the last four to seven weeks. I view these pullbacks as corrections within bigger uptrends because all four are above their 200-day SMAs and all four hit new highs in June. However, the choppiness of these pullbacks is a concern because a correction should be more controlled. Choppy price action translates into volatility and this means the chances of whipsaw are above average when trading short-term patterns or setups.

Correcting since May with Falling Channel/Wedge

MDY, XLI, IFRA, MOO

ETFs in this next group recorded new highs in May and then corrected with falling channels or wedges. The first chart shows the Infrastructure ETF (IFRA), which is highly correlated with the Industrials SPDR (XLI). As you can see, the pattern here looks awfully familiar. The ETF broke the wedge line with a seven day surge and is challenging the mid late June highs. A follow through breakout at 35.90 would be bullish and argue for a continuation of the bigger uptrend. The indicator window shows RSI breaking out.

The next chart shows the Agribusiness ETF (MOO) with a falling channel and surge to the resistance zone. RSI is also challenging the early July high just above 50 and follow through breakouts would be bullish.

New High in June, Sharp Correction, Oversold Bounce

XLE, XES, XOP, FCG

The energy-related ETFs hit new highs in June and then corrected hard with sharp declines into mid July. They gapped down on July 19th and up on July 21st to form island reversals. These reversals are largely holding and bullish as long as they do. The first chart shows the Energy SPDR (XLE) hitting the April low and 33% retracement as RSI dipped below 30. The ETF reversed just above its rising 200-day and this is bullish until proven otherwise. A strong reversal should hold and this means the gap on July 21st holds the first key. A close below the July 20 close would argue for a re-evaluation. This is the short green line at 47.50.

The next chart shows the Natural Gas ETF (FCG) holding up better than XLE. Notice that FCG retraced around two thirds of the prior advance and formed its island reversal well above the April low.  The gap from July 21st is holding and the green support line is set at 13.70.

Rangebound since February-March

IWM, IJR, IPAY

The Russell 2000 ETF (IWM) and S&P SmallCap 600 SPDR (IJR) have been stuck in trading ranges since March. This is because several key groups have been correcting the last few months (banks, industrials, metals, materials, housing). Correction-ending breakouts would end these corrections and benefit small-caps. The chart below shows IWM bouncing off support in the 207-212 area for the fourth time since early March (blue shading). The ETF surged two days last week and then stalled the last five days. The candlestick chart shows a small bull flag and a breakout at 223 would be bullish. Such a move would argue for a challenge to the range highs.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
Choose a Strategy, Develop a Plan and Follow a Process