ETF Trends, Patterns and Setups – SPY Grinds, Techs Lead, Banks and Small-caps Drag, Clean Energy Perks Up (Premium)

The S&P 500 SPDR remains in a steady uptrend with a grind higher, but we are seeing less strength as we move down in market cap. The S&P 500 EW ETF has been flat since May, while small-caps and mid-caps have been flat since March.

SPY is caught up in rotations within the market that generally favor large-caps. Most recently, we are seeing a strong rotation into the tech sector and this is by far the largest sector in the S&P 500. Money has moved out of banks, steel, base metals and agriculture. ETFs related to these groups are still in uptrends overall, but in correction mode right now.

The tech-related ETFs are by far the strongest since mid May, but they are getting short-term extended. The Home Construction ETF and Healthcare Providers ETF both formed corrections within uptrends and I am seeing bullish setups. Two clean energy ETFs are also setting up with bullish patterns. I am avoiding the commodity related ETFs right now and will wait for the dust to settle (DBB, COPX, CPER, DBA, SLX).

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

SPY Grinds as RSP Stalls

The S&P 500 SPDR (SPY) is maintaining its steady uptrend with a grind higher. For the sixth time this year, the ETF touched the 50-day SMA and bounced, like clockwork. Also notice that RSI dipped into the 40-50 zone at least four times. The price dips to the 50 day and RSI dips into oversold territory gave way to mean-reversion bounces. The red lines on the price chart show when SPY was essentially flat for six to eight weeks (late Feb to late March) and now. This flat trading represents a rotational correction within SPY. Currently we are seeing tech, healthcare, communications services, REITs and energy lead, while finance, industrials, materials, staples and utilities correct.

The S&P 500 EW ETF (RSP) does not have the luxury of a 27% weighting in the tech sector, which is why SPY is holding up so well. Tech accounts for 15% of RSP. RSP remains in an uptrend, but has been flat since early May, which is when many of the big tech-related ETFs bottomed. The red lines and blue dashed lines show the last two flat periods. The current triangle is viewed as a corrective period within a bigger uptrend. Recent weakness in industrials, finance, materials and staples is weighing on the average stock in the S&P 500.

Mid and Small Caps Extend 3-month Stall

The S&P MidCap 400 SPDR (MDY), S&P SmallCap 600 SPDR (IJR) and Russell 2000 ETF (IWM) are in long-term uptrends, but largely flat since March. In fact, all three are below their mid March highs, which means they have nothing to show the last three months. I don’t see any real setups on these charts because trading is quite choppy and they are not leading. The chart below shows IJR failing to hold its breakout in early June and falling back into the consolidation pattern. Pass.

QQQ Leads with New High

QQQ is the only one of the major index ETFs to record a new high this week and is the clear leader. The setup occurred in mid May and the short-term breakout (signal) was on May 20th with the move back above the rising 50-day SMA. This is an example of trading the downswing reversal within a bigger uptrend. QQQ followed through to a new high and continues to hold the ATR Trailing Stop, which is for short-term traders. XLK sports a similar price chart.

Leading Sectors


The Technology SPDR (XLK), Healthcare SPDR (XLV), Communication Services SPDR (XLC), Consumer Discretionary SPDR (XLY), Real Estate SPDR (XLRE) and Energy SPDR are the leading sectors. All are above their 50-day SMAs and relatively close to new highs. XLK recorded a new high this week. XLY was dragging its feet, but broke out short-term with a surge the last three days. XLRE and XLE are not shown. Overall, these six leading sectors account for around 70% of the S&P 500. Thus, we can see why SPY is holding up.

The 50-day SMA can be used to benchmark performance. ETFs trading above the 50-day SMA are stronger than ETFs trading below. ETFs trading well below their 50-day SMAs are lagging the broader market because SPY is above its 50-day SMA.

Lagging Sectors


The Finance SPDR (XLF), Industrials SPDR (XLI), Materials SPDR (XLB) and Consumer Staples SPDR (XLP) failed to hold their pennant breakouts and sliced through their 50-day SMAs with rather sharp declines the last few weeks (red shading). XLB did not actually breakout, but fell all the same. Money clearly moved out of these sectors and this weighed on the broader market. Even though the long-term trends are still up, these four are in corrective mode and showing relative weakness since May. Time to stand aside and wait for the next setup to materialize. We can throw the Utilities SPDR (XLU) into this lagging group because of its failed breakout. Overall, these five lagging sectors account for 30% of SPY.

Near New High, Stalling Short-term


Oil surged to another new high with a 2.5% pop this week and extended further on its cup-with-handle breakout (see August crude futures chart in upper left). Long-term, spot crude broke out to multi-year highs. Short-term, oil is very extended after a 15+ percent advance since mid May. The breakout zone in the 66 area turns first support should we see a pullback.

The next chart shows four energy-related ETFs with similar patterns: falling wedges into late April, breakouts in early May and new highs in June. All four remain above their rising 50-day SMAs, but were hit hard last week and three of the four triggered their ATR Trailing Stops (red lines). These four remain in uptrends overall and clear leaders, but I do not see a setup in the works right now.

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

Strong Uptrend with Short Pullback


REITs are also leading the broader market with new highs in early June and short pullbacks the last week or so. These pullbacks are too short for me to consider them as robust setups. There are setups, such as falling flags, but they are so short-term that the chances of whipsaw are above average. Also note that the current advance in REITs started in mid January and is quite mature. Anecdotal evidence suggest that flag breakouts work best in the early to middle stages of an advance (3-4 months) and less well in the mature stage (5 plus months). The chart below shows XLRE with RSI exceeding 80 on June 10th. XLRE fell the last eight days and could have further to correct because RSI is not yet oversold and price remains above the 50-day.

Choppy Uptrend


I am looking for ways to further quantify a mean-reversion setup. An RSI dip into the 30-50 zone represents an oversold condition, but there are often too many such dips. I would like to quantify these dips with another indicator. The chart below shows the Aerospace & Defense ETF (XAR) with the green lines marking a linear regression in the middle and the outer bands set 2 standard deviations above/below. A move above the lower line represents an oversold condition. Combined with an RSI dip into the oversold zone (30-50), this is a short-term mean-reversion setup. The blue line in the upper right marks the level of the lower band at 126 right now. Thus, a dip to this level would create a mean-reversion setup. These linear regression bands “look” good, but are still very subjective because one must choose the starting point.  

Consolidation Breakout, Throwback


The Global Auto ETF (CARZ) and Self-Driving EV Tech ETF (IDRV) are leading the market because they broke out of consolidations and hit new closing highs in late May. They both fell back into mid June, became mildly oversold and bounced with the broader market this week. CARZ is the stronger of the two because it is trading above its breakout zone. CARZ also sports a possible bull flag and a breakout at 62 would be bullish.

Falling Wedge Breakout, Strong Follow Through


The Medical Devices ETF (IHI) broke out of a falling wedge with a surge on June 10-11 and followed through with further gains the last two weeks. The ETF is very close to a  new high and showing leadership. Short-term, IHI is quite extended and I do not see a setup right now.

Big Triangle Breakouts


Now we get to the new leaders: the big tech-related ETFs. The Software ETF (IGV), Internet ETF (FDN), Cloud Computing ETF (SKYY), Cybersecurity ETF (CIBR) and Biotech ETF (IBB) formed big triangles from February to May and broke out of these triangles with big advances since mid May. They are up between 9.66% (IBB) and 15.38% (IGV) the last six weeks. Also note that RSI exceeded 70 at some point this month for all five. This shows strong upside momentum that usually bodes well longer term. Short-term, however, they are all quite extended and there are not any setups working, except perhaps for IBB. Note that the setups were in mid May as they tested support and the triggers were around May 20th as they broke short-term resistance. I will keep these on a close watch for tradable backs or bullish setups in the coming weeks. The chart below shows IGV with a short-term breakout and RSI “W” breakout on May 20th (blue arrows), and a bigger triangle breakout in early June. IGV is up over 15% without a rest.

Big triangle, Consolidating Near Resistance


The Semiconductor ETF (SMH) is lagging a little because it has yet to break out of its triangle. Long-term, SMH surged into mid February and then formed a large triangle, which is a continuation pattern (bullish). A breakout would open the door to new highs and signal a continuation of the long-term uptrend. Short-term, we can see a surge from mid May to early June and a consolidation on the candlestick chart. SMH broke out of the pennant on June 14th, but fell back into the trading range. The June lows are holding and they mark support for the short-term upswing. A break below these lows would be short-term negative and reverse this upswing.

Holding Upswing, but Possible Lower High


The Semiconductor ETF (SOXX) and Mobile Payments ETF (IPAY) are in uptrends overall, but lagging a bit because they have yet to exceed their April highs. Note that IGV, FDN, CIBR and SKYY exceeded their April highs. For now the short-term swing remains up for both and an actual lower high has yet to form. This means the cup is still half full. The green support lines and ATR Trailing Stops are the first levels to watch. A close below the June lows would reverse these upswings.

Big Falling Wedge, Breakout, Below April High


The FinTech ETF (FINX) and Biotech SPDR (XBI) forged lower lows from March to May and formed BIG falling wedges. These patterns are also typical for corrections within a bigger uptrend. FINX broke out with a 17% surge since mid May. The breakout is long-term bullish because it signals an end to the correction and resumption of the bigger uptrend. Short-term, FINX is quite extended and there is no setup right now.

Long-term Uptrend, Short-term Oversold, StochRSI Pop


The Home Construction ETF (ITB) and Healthcare Providers ETF (IHF) are lagging because they peaked in mid May and fell the last six weeks. Even though their declines are quite different, both declines are viewed as corrections within bigger uptrends. ITB formed a falling wedge, while IHF formed a falling channel. ITB retraced around half the prior advance, while IHF retraced around one third. RSI dipped below 40 for both and became oversold. Both bounced the last few days and the candlestick charts show StochRSI pops (short-term momentum pop). Follow through above the red resistance zones would be bullish too. The red lines on the bar charts mark the ATR Trailing Stops for reference. Note that an ATR Trailing Stop is really not needed this early because the low of the pattern can be used to set the initial stop. The ATR Trailing Stop comes into play after upside follow through.

Short-term Bullish Continuation Patterns


We have all heard the saying: the bigger they are the harder they fall. The same is true with price moves. The bigger the price advance, the bigger the correction. The Global Clean Energy ETF (ICLN) and Clean Energy ETF (PBW) produced obscene advances from the March 2020 low to the February 2021 high (300 to 500 percent). They then fell with 40 to 48 percent declines. These declines, however, retraced around half of the prior advance (see line chart upper left). Thus, the two steps forward and one step backward scenario is still possible here (uptrend).

The February-May declines also formed BIG falling wedges and both broke out of these wedges with double digit gains from mid May to early June (bar charts). My attention is now on the short-term bullish patterns that formed the last few weeks (see candlestick chart lower left). Both sport bullish pennants and breakouts would open the door to further gains. A close below the green lines (ICLN 22 and PBW 85) would call for re-assessment.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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