ETF Trends, Patterns and Setups – S&P 500 Continue to Lead, Finance and Industrial SPDRs Battle for Breakouts, EV ETFs Take the Lead Again (Premium)

Tech, Healthcare, Communication Services, REITs and Water are leading the market since mid May. ETFs related to Finance, Industrials, Materials and Energy corrected in June and July. Some made bids to end these corrections (Housing, Copper, Steel) and some are struggling to get above resistance (XLI, XLF). Downtrends in the Regional Bank ETF (KRE) and Bank SPDR (KBE) are weighing on the Finance SPDR, while weakness in the Aerospace & Defense ETF (XAR) is weighing on the Industrials SPDR (XLI).

Overall, we continue to see this rolling/rotational correction play out in the major index ETFs. SPY is grinding higher and the S&P 500 EW ETF (RSP) broke out to a new high. Performance deteriorates as we move down the scale in market cap because the S&P MidCap 400 SPDR (MDY) has yet to clear its early July high and the Russell 2000 ETF (IWM) remains rangebound.

The over market bias remains bullish even though there are plenty of reasons for concern. So many people are talking about bearish seasonal patterns for August-September and waning breadth, myself included, that I must wonder if they will actually play out. The market rarely appeases the majority! I highlighted some concerns on July 20th and three breadth indicators to watch for an actual signal on July 30th. Concerns amount to a wall of worry for Wall Street to climb. A signal is something more tangible and this can be used for actual timing. So far no signal and thus no correction for the S&P 500.

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

Strong Uptrend, New High this Week


Healthcare, Water and REITs are leading the charge with fresh new highs this week. The Healthcare SPDR (XLV) is up over 10% since early June and getting short-term extended within its long-term uptrend. Short-term extended simply indicates that the odds of a reversion to the trend mean are above average. The thick green line is a linear regression covering the advance since early November. A linear regression is the “line of best fit” for closing prices since early November and this represents the trend mean. Price is quite far from the trend mean right now and this means we could see a rest or pullback in the coming weeks.   

The Water Resources ETF (PHO) broke out of a triangle formation in mid June and is up over 10% since late June. The thick green line is the linear regression and price is well above the trend mean right now. This is not necessarily bearish, it just suggests that the odds of a pullback or rest are above average.

Choppy Uptrend, New High this Week


The Semiconductor ETFs (SOXX, SMH) stole the show the last two weeks with big advances to new highs. Both were already in long-term uptrends, but these uptrends were rather choppy. The chart below shows SOXX with higher highs and higher lows since February and a rising channel of sorts (green lines). The ETF surged above the 50-day SMA in late May and then bounced off this moving average in June and July. This week’s new high simply affirms the bigger uptrend and upside leadership. This is positive for the tech sector and Nasdaq.

Steady Uptrend, Grind Higher


The S&P 500 SPDR (SPY) remains in a steady uptrend as it continues to hold its rising 50-day SMA and grind higher. Most recently, SPY surged from 424 to 442 and then stalled with a flag pattern (candlestick chart lower left). This is a bullish continuation pattern and a breakout would argue for a continuation higher. Personally, I would prefer a pullback type setup over a breakout signal at this stage because the risk of whipsaw (loss) is above average.

Choppy Uptrend, New High Late July, Overextended


Where as SPY and XLC are grinding higher with steady uptrends, the Nasdaq 100 ETF and Technology SPDR are moving higher with choppier uptrends. This just means the swings from low to high and high to low are bigger. Both QQQ and XLK remain with a series of higher highs and higher lows (uptrend). They are also quite extended as both are up more than 15% since mid May. This puts them in the trend-monitoring phase, which means there are no setups right now. A pullback to the rising 50-day SMA and/or RSI dip in the oversold zone would provide the next setup.

Big Triangle Feb-May, June Breakout, Extended


ETFs in the next three groups hit new highs in February and were leading the market. They then corrected into May with big triangles or falling wedges that extended over a three month period. The tech-related ETFs bottomed in mid May and broke out of these patterns with big moves in June. The breakouts are long-term bullish, but some are quite extended (IGV) and some fell back after the breakout (FDN).

The charts below show the Software ETF (IGV) and Cybersecurity ETF (CIBR) hitting new highs with big advances off the May low. The Biotech ETF (IBB) also surged some 20%, but remains just short of a new high. All three are in strong uptrends, but also a bit extended and ripe for a rest. This just means I do not see a setup on the chart right now and will wait for a bullish setup to materialize.

Big Triangle Feb-May, June Breakout


The Internet ETF (FDN) and Cloud Computing ETF (SKYY) also sport big triangles, breakouts and big moves. They also have short-term setups right now. The first chart shows FDN gapping down because its top holding (Amazon 9.28% weight) fell 7.5% on July 30th. Also note that Paypal is down around 10% the last eight days. The decline in FDN puts its back at it rising 50-day SMA and RSI in the oversold zone, which is a short-term bullish mean-reversion setup.

The next chart shows SKYY with a dip to the rising 50-day SMA and an RSI dip into the oversold zone in mid July. The ETF got its mean-reversion bounce and then consolidated for a week. The candlestick chart shows a surge and flat flag forming. A breakout at 107 would be short-term bullish and argue for a continuation higher.

Big Falling Wedge Feb-May, June Breakout


The FinTech ETF (FINX) forged a lower low from March to May and a large falling wedge formed as a result. This pattern is also typical for corrections within bigger uptrends. The correction was big, but the preceding advance was even bigger (+48%). FINX broke out in June, fell back to the rising 200-day in mid July, became oversold and bounced. This bounce and breakout on the candlestick chart are bullish as long as the late July low holds.

Correction June-July, late July Breakout


ETFs in this next group corrected from February to May and then broke out with big moves from mid May to mid June. They then corrected with pullbacks into mid July and broke out again with surges the last 2-3 weeks. The top left window shows the Global Auto ETF (CARZ) with the signal labels and the other three charts are essentially the same. The Self-Driving EV Tech ETF (IDRV) and Autonomous EV ETF (DRIV) are a little stronger because they recorded new highs this week. The short red lines show the ATR Trailing Stops for reference.

The Dividing Line for Performance

While the ETFs in the groups above advanced from mid May to July, ETFs in the next few groups fell from May to July with corrections of some sort (falling wedges or channels). This is part of the rolling or rotational correction within the broader market. We are seeing wedge/channel breakouts in several of these ETFs (ITB, COPX) and a pair of sector ETFs failing to get through resistance (XLI, XLF).

Correction May-July, Wedge Breakout Working


ETFs in this group broke out of falling wedge patterns to varying degrees. Falling wedges or channels that retrace around 50% of the prior advance are typical for corrections within bigger uptrends. The advance represents a two step forward sequence and the pullback is one step backward. A wedge breakout signals an end to the correction and a resumption of the bigger uptrend. When these patterns are setting up, I also employ candlestick analysis and/or StochRSI to identify an early momentum pop that can lead to a breakout.

The first chart shows the Home Construction ETF (ITB) with a falling wedge that retraced 50%, a StochRSI pop on July 20th and a break back above the 50-day SMA a few days later. There are two ways to manage a trade at this point. First, long-term trend followers can use these patterns to time pullbacks and exit when the long-term trend reverses. Second, traders can use these patterns to identify good reward to risk setups and then employ an ATR Trailing Stop (red line). Chartists can also allow more wiggle room by setting a stop based on chart support. The choice is yours. Just make sure you think out your plan first and then trade according to that plan.

The next chart shows the Infrstructure ETF (IFRA) with a break above the wedge line and a pullback the last four days. The pullback was not as deep as the pullback in ITB, but the breakout does not look as strong (convincing). Nevertheless, there is a pattern/setup and a breakout/signal. The red line shows the ATR Trailing Stop for reference.

Correction May-July, Wedge Breakout   COPX, SLX, XME, MOO

ETFs in this next group also have wedge breakouts to some degree. Before looking at the Copper Miners ETF (COPX), I would like to show the Copper ETF (CPER) because its breakout is failing and this could have ramifications for COPX. CPER broke out with a big move in late July, but gave back over half of this gain with a sharp decline the last seven days. The breakout has failed and the ATR Trailing Stop triggered. The long-term trend is still up, but more correction could be in store now. In a separate, but related note, you can track copper futures at the CME (here).

The next chart shows COPX with a falling wedge correction to the rising 200-day and a break above the 50-day SMA late last week. RSI also broke above its prior high for a momentum breakout of sorts. COPX edged lower the last few days, but not to the same degree as CPER. The red line shows the ATR Trailing Stop right at the breakout zone and 50-day SMA. Allowing for some buffer, a close below 62 would call for a re-evaluation.

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

Correction May-June, Short of Breakout


The Finance SPDR (XLF) and Industrials SPDR (XLI) are struggling to break out and end their corrections. Both hit new highs in June and then corrected with pullbacks into mid July. They bounced to resistance three weeks ago and then stalled. The candlestick charts show bull flags with breakouts on Tuesday. Both fell back into their flag patterns on Wednesday. The cup is still half full (bullish), but I would re-evaluate should they close below their flag lows. A short-term support break at this stage would represent a failure at resistance and signal more correction ahead.

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

Sharp Decline June-July, Island Reversal, No Follow Through


The energy-related ETFs were hit hard from mid June to mid July with sharp declines towards their rising 200-day SMAs. XES was hit the hardest as it touched the 200-day and is below it now. All four forged island reversals (green circles) and the Energy SPDR (top left) is the only one holding its 21-July gap. The other three failed to hold their reversals and could have further room to correct. XLE would fill its gap with a close below 48.50

Trading Range since Feb-Mar, Short-term Bearish Pattern


I prefer to ignore bearish setups or patterns in bull markets or when price is above the 200-day SMA. Nevertheless, small-caps and micro-caps have gone nowhere since February-March and short-term bearish continuation patterns formed. The chart below shows IWM bouncing off support in mid July with a rising wedge taking shape. The trend is up as long as the wedge rises and I am marking short-term support at 217. A break here would reverse this short-term upswing and argue for a continuation of the June-July decline. The next chart shows the Russell Microcap ETF (IWC) with a pennant break.

Weak Since March, June-July Falling Channel, No Breakout


And what about these banks? Banks are to fintech (Square, Paypal) what fossil fuel is to renewable energy. There is clearly a changing of the guard underway. The Regional Bank ETF (KRE) continues to move in the same direction as the 10-yr Yield (down) and neither broke out to reverse their two month downtrends. The chart shows KRE testing its rising 200-day as it retraced a third of the prior advance. The falling channel and retracement are typical for corrections within a bigger uptrend, but the channel is still falling. A breakout at 65 and RSI break above 50 are needed for a bullish reversal.

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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