Earnings season is in full swing and this is leading to a little more volatility. Volatility mostly affects individual stocks, but it can also affect market cap weighted ETFs when the big components make big moves. Overall, the market regime remains bullish with fresh new highs in SPY, RSP and MDY. There are not very many bullish setups because we saw a number of setups in late September and early October, and then short-term breakouts in early October and mid October. ETFs with setups and signals are in the trend-monitoring or trade management phase. Energy and finance related ETFs were hit over the last few days, but they remain the market leaders overall. The Electric Vehicle ETFs are also leading with new highs and a few of the tech-related ETFs are powering the tech sector, which is still the biggest sector in the S&P 500.
Broad Market ETFs
Large-caps continued to lead with SPY hitting a new high and QQQ very close to a 52-week high. Both are up around 6% here in October. As usual, performance wanes as we move down in market cap with the S&P 500 EW ETF (RSP) and S&P MidCap 400 SPDR (MDY) up just over 4%. These two also recorded new highs here in October, although MDY fell back into its trading range, which has been in play for six months. Small-caps continue to lag as IWM did not record a new high and remains rangebound since April. Personally, I am not concerned with relative weakness in small-caps because SPY and RSP are the two most important broad market benchmarks. Both hit new highs and this affirms the bull market.
The chart below shows SPY with a wedge breakout that occurred with a gap, strong close and strong breadth. S&P 500 AD Percent exceeded 80 (green arrows/bars). The bottom window shows the S&P 500 Zweig Breadth indicator moving above .615 on Monday and Tuesday to trigger a Zweig Breadth Thrust. Note that Zweig originally used NYSE breadth data and required a move above .615 within 10 days of dipping below .40. I am using S&P 500 breadth data and I relaxed the 10-day timeframe.
Overall, the price chart shows a steady advance since the early November surge and breakout. With the S&P 500 up over 6% and at a new high, there is no setup or pending signal to monitor. The ETF is simply bullish and in the trend-monitoring phase.
QQQ and many of the tech-related ETFs corrected into early October, formed harami candlestick patterns on October 4/5, and then broke out. QQQ formed a falling flag that retraced half of the May-Sep advance, broke out with a gap surge on October 14th and surged to its September high. As with SPY, there is no setup in play or pending signal. The trend is up and QQQ is in the trend-monitoring phase. Note that Apple and Amazon report on Thursday.
The S&P SmallCap 600 SPDR (IJR) broke out of a small flag on October 7th and broke the upper line of a larger triangle two week’s later. The advance here in October is quite tepid and the breakout is hardly convincing, especially after the sharp decline the last two days. Despite relative weakness and directionless price action, the cup is half full for small-caps because the Market Regime is bullish and support from the Aug-Sep lows has yet to be breached.
Small-caps, Financials and Healthcare
Note that the biggest sector in the S&P SmallCap 600 SPDR (IJR) is quite different than the biggest sector in the Russell 2000 ETF (IWM). According to the iShares website, financials is the largest sector in IJR (19.14%) and healthcare is the largest sector in IWM (19.4%). The Small-cap Finance ETF (PSCF) hit new highs in mid October and fell back the last two days. The Small-cap Healthcare ETF (PSCH) has been range bound for over six months and is near the low end of this range. The chart below shows PSCF (top window) with an upswing since early September and PSCH with a downswing. A break above the mid October highs would reverse this downswing in PSCH.
Small-cap biotechs are largely to blame for weakness in small-cap healthcare. The chart below shows the Biotech SPDR (XBI), which has a lot of small-cap biotech stocks (100+). Note that Biotechs were featured last Friday [1]. The chart below shows XBI in a downtrend, but near support in the 120 area. StochClose is bearish since late March and XBI is below its falling 200-day. Despite the downtrend, potential support in the 120 area keeps this one on my radar for a short-term breakout. The swing since early September is down and a break above the mid October highs would reverse this downtrend. This would be short-term bullish and provide the early bird signal. Further strength would be needed for the trend-following signal.
The next chart shows the Biotech ETF (IBB) with a wide rising channel here in 2021. The ETF fell sharply in late September and this decline retraced around 2/3 of the prior advance (24%), The Momentum Composite also became oversold eight times (green arrows). There was a StochRSI pop on October 12th and a breakout on Monday. IBB fell back pretty hard on Wednesday, but we need to give volatile biotechs some wiggle room.
Falling Wedge Correction, September Breakout, New High
XLE, XOP, FCG, XES*, AMLP*
Energy-related ETFs are leading the market to varying degrees. The Energy SPDR (XLE), Oil & Gas Exploration & Production ETF (XOP) and Natural Gas ETF (FCG) broke out of falling wedge patterns in September and extended to new highs with market leading gains. The Oil & Gas Equipment & Services ETF (XES) and MLP ETF (AMLP) broke out a little later and have yet to hit new highs. The breakouts are bullish and ETFs hitting new highs this week are leading. These energy-related ETFs are short-term extended at the moment and I do not see a setup right now (bullish continuation pattern, short-term pullback/oversold). These ETFs are in the trend-monitoring phase.
FCG is up over 50% since mid August and showing no signs of letting up. The 194% surge from November to June featured three short-term bullish patterns along the way, but the Momentum Composite never dipped to -3 or lower (oversold). Pullbacks tend to be shorter in strong uptrends and a 1-2 week pullback is something to watch for going forward.
You can learn more about falling wedge patterns in this video. [2]
The Oil & Gas Equipment & Services ETF (XES) is lagging the others, but has a breakout nonetheless. At this stage, I am watching for either a short-term oversold condition or a short-term bull flag, wedge or triangle to unfold.
You can learn more about my chart strategy in this article [3] covering the different timeframes, chart settings, StochClose, RSI and StochRSI.
The finance-related ETFs were hit the last two days as the 10-yr Treasury Yield fell sharply and the 20+ Yr Treasury Bond ETF (TLT) surged. Despite these moves, the finance-related ETFs remain with long-term breakouts and uptrends. As with the energy-related ETFs above, a pullback would be welcome because it could produce a short-term oversold condition and/or a short-term bullish continuation pattern. The chart below shows KRE breaking out in late September and extending after this breakout. KRE fell 3.5% on Wednesday, but the Momentum Composite is at zero and we have yet to see any oversold indications yet.
The Insurance ETF (KIE) broke out later than the others (early October) and hit a new high this week. KIE fell 2.2% on Wednesday, but is not yet oversold and I do not see a short-term bullish continuation pattern on the chart.
Long Triangle Consolidation, Breakout, New High
MOO, DBA
The Agribusiness ETF (MOO) also formed a big triangle, broke out in mid October and hit a new high this week. A triangle after a big advance is a consolidation within an uptrend and a bullish continuation pattern. This makes the breakout bullish because it signals a continuation higher. Overall, MOO trades quite choppy so I would not be surprised to see a dip back into the consolidation. Perhaps this would provide another short-term oversold setup.
The Lithium Battery Tech ETF (LIT) is also leading with an extended flag, flag breakout and new high. I was watching the swing within the flag and the early bird signal was the resistance breakout within the flag on October 13th. The red line shows the ATR Trailing Stop (3 x ATR(22) values below highest close since October 13th). This stop is quite tight, which means the chances of a hit are high should volatility pick up. Chartists looking for more wiggle room may want to lower the stop.
You can learn more about ATR Trailing stops in this post [5],
which includes a video and charting option for everyone.
The Electric Vehicle ETFs remain in choppy uptrends with new highs this week. Thus, they are leading based on the price charts. Note that there is a huge difference between the Global Auto ETF (CARZ) and the other two (DRIV and IDRV). Auto manufacturers feature in the top ten for CARZ (Tesla, Daimler, GM, Toyota, Honda, Ford, BMW, Porsche and BYD (China)). The top ten stocks in IDRV look more like big tech (Tesla, AMD, Nvidia, Alphabet, Apple, Qualcomm, Toyota, Daimler, Intel, Samsung). What the heck is Intel doing here! Well, to be fair, the iShares website lists IDRV as the “Self-Driving and Tech ETF”. Despite these differences, the charts for CARZ and IDRV are not that different.
The tech-related ETFs are pretty much in the same boat: long-term uptrends, short-term pullbacks into early October, harami on October 4/5 and breakouts. The Cloud Computing ETF (SKYY), Cybersecurity ETF (CIBR), FinTech ETF (FINX) and Software ETF (IGV) are leading because they hit new highs this week. These four were also up more than 10% the first three weeks of October. This means they are short-term extended and there is no setup right now. The chart below shows IGV surging from 390 to 440 in three weeks. The trend is up and strong, but IGV is short-term extended and I do not see an active setup.
The Internet ETF (FDN) and Semiconductor ETF (SOXX) are also in uptrends overall and both experienced short-term breakouts, but they did not hit new highs. The chart below shows SOXX with a choppy uptrend since March. It looked like the bottom was falling out in late September as SOXX broke below the mid August low. However, short-term support breaks in long-term uptrends are always a bit suspect, especially with ETFs. SOXX became oversold a few times, stabilized into October and broke out with a StochRSI pop on October 14th. The uptrend remains in play.
FDN is a real hodge-podge of “internet” stocks and not as homogeneous as the other tech-related ETFs. FDN’s second biggest component (Amazon 9.5%) reports today, its third biggest component (Facebook 6.5%) is under pressure and its fourth biggest component (Paypal 4.4%) is down 24% since late July. FDN is clearly not as strong as the others because it stalled out in July and fell sharply the last four days.
ETFs in this next group are in uptrends overall and then pulled back with short corrections (2-4 weeks). These ETF stabilized in early October and broke out with strong moves. The Real Estate SPDR (XLRE), REIT ETF (IYR) and Residential REIT ETF (REZ) are near their September highs already. The Healthcare SPDR (XLV), Medical Devices ETF (IHI) and Water Resources ETF (PHO) are less strong because they remain well below their September highs. Nevertheless, they have breakouts working and they extended after their breakouts. Now is the time to manage the trade because there are no setups right now. Manage the trade means to consider a profit target, stop-loss and/or exit strategy.
The Global Carbon ETF (KRBN) is one of the leaders this year with a 60+ percent gain year-to-date. The uptrend was so strong that the Momentum Composite did not dip to -3 and did not become oversold. The short triangles and wedges were the only opportunities to partake in the long-term trend. Most recently, KRBN formed a small bull wedge and the Momentum Composite dipped to -2 for its lowest reading of the year. This is a very mild oversold condition and the ETF broke the wedge line with a surge last week. StochRSI also popped above .80 on October 22nd.
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. [7]
The Dry Bulk Shipping ETF (BDRY) was hit hard with a 30+ percent decline in three weeks. Of course, this decline followed a 452% advance from January 1st to October 6th. This decline pushed the Momentum Composite to -5 and its most oversold condition of the year. The ETF bounced on Wednesday and this is the first sign of buying interest since becoming oversold. The next signal to watch for is a StochRSI pop above .80. Achtung! This ETF has extremely high volatility and risk.
The Sports Betting iGaming ETF (BETZ) has a bull flag working after a 22% surge. BETZ broke out in early August, surged above 30 and then corrected with a choppy decline the last eight weeks. I cannot draw a picture perfect flag, but the decline looks corrective with its 50% retracement and zigzag lower. BETZ broke short-term resistance (within the flag) on October 14th and there was also a StochRSI pop. The slight pullback over the last few days affirms resistance at the upper flag line and a breakout at 31.5 would be bullish.
Note that I will cover the groups below tomorrow:
Long Falling Wedge Correction and Breakout
IYT
Long Correction, Breakout and Throwback
COPX, CPER, DBB
Short-term Upswing within Bigger Correction (multi-month downtrend)
XLI, IFRA, XLB, ITB, XHB
Tepid Breakout within Bigger Correction
SLX, UFO