Grouping and Ranking Core ETFs – Consumer Discretionary and Precious Metals Come to Life

The strong continue to strengthen and the laggards are leading short-term. Overall, this suggest that the bull market continues to broaden and pick up more converts. The S&P 500 SPDR, Nasdaq 100 ETF and Technology SPDR were leading all year and they simply extended their leads with fresh new highs this week. The energy-related ETFs were lagging all year and then surged over the last five weeks.

The Consumer Discretionary SPDR was lagging because it had yet to break above its July-September highs, until last week. XLY broke out last week and extended on that breakout this week. Thus, we finally have all six big sectors with new highs over the last few weeks. XLI is dragging its feet in December, but still with a bullish configuration.

The big news this week is the breakout in the Gold SPDR and Gold Miners ETF. Both were challenging resistance last week and broke out with strong moves the last three days. Weakness in the Dollar Index also helped. Elsewhere, I am seeing bullish continuation patterns taking shape in the Real Estate SPDR, Aerospace & Defense ETF and Home Construction ETF. Details and charts below…

Holiday Scheduling

Today’s reports are condensed because there has not been much change over the last few trading days and we are smack dab in the middle of the holiday season. Full reports will resume on January 2nd. Happy New Year!

QQQ Gets Seriously Extended

QQQ is now up some 16% since early October and 6% over the last three weeks. The trend is up, the trend is strong, and the trend is getting extended. Notice that RSI(10) moved above 85 for the third time in two years and QQQ corrected pretty hard after the first two overbought readings.

Short-term overbought is a double edged sword. It takes strong upside momentum to become overbought and this is long-term bullish. On the other side, an extreme overbought reading increases the chances of a correction, which can involve a pullback or consolidation. An RSI(10) move above 70 is a “normal” overbought reading and we sometimes see further gains. A move above 85, however, is an extreme overbought reading that warrants a little caution going forward.

XLY Finally Breaks Free

The Consumer Discretionary SPDR (XLY) came to life with a breakout just before Christmas and its biggest one day advance (1.22%) since early September. Overall, XLY broke out of a large Ascending Triangle and this signals a continuation of the bigger uptrend.

Strength in retail helped because this industry group accounts for around 31% of the ETF, and this does not include Amazon. The next chart shows the Retail SPDR (XRT) breaking out in late October, holding above this breakout with a triangle consolidation and breaking out again over the last two weeks.

Amazon (AMZN) accounts for 23.77% of XLY and is the biggest component, by far. I featured AMZN last Saturday in the long-term setups and the stock broke out. Notice how AMZN stalled in the 1700-1800 area from August to December. This zone also marked a support zone from prior resistance. This week’s surge above the October-November highs and 40-week SMA is bullish.

XLI Consolidates after Breakout

The Industrials SPDR (XLI) is underperforming the broader market over the last five weeks, but still has a bullish chart. Note that SPY is up around 3.5% over the last 25 days and XLI is basically flat. Nevertheless, the XLI chart is bullish with a breakout on November 1st and a consolidation above this breakout zone. Also note that XLI was up around 10% from early October to late October. As a consolidation after a breakout and big move, I consider it a bullish continuation pattern and expect a bullish resolution (move higher).

In general, bullish resolutions are more likely when we are in a bull market environment and when the ETF is in a long-term uptrend. Thus, I would not read too much into short-term underperformance when the price chart is bullish overall.

The next chart shows the Aerospace & Defense ETF (ITA), which is part of the Industrials sector. This chart sports a bullish continuation pattern with a falling wedge over the last five weeks. This is a pretty mild correction after a new high. Also notice that RSI(10) moved below 30 last week and turned back up. Again, the odds favor a bullish resolution so I expect a wedge breakout.

XLRE Challenges Wedge Line

The Real Estate SPDR (XLRE) has been lagging the broader market since late October, but the chart is still bullish overall. Note that XLRE hit a 52-week high in late October and then fell back to the rising 200-day SMA in mid December. XLRE declined when SPY advanced and this is why it shows relative weakness. Even so, the falling wedge looks like a correction within a bigger uptrend and a bullish continuation pattern. XLRE bounced of the 200-day last week and broke the wedge line this week. It looks like a breakout is in the making and this signals a continuation of the bigger uptrend.

Home Construction ETF Extends its Stall

The Home Construction ETF (ITB) and Homebuilders ETF (XHB)  are in a similar situation as XLRE. Both hit new highs in late October and then underperformed the broader market the last eight weeks. Despite this underperformance, ITB and XHB are consolidating within bigger uptrends. You know what I am going to say next. A consolidation after an advance is a bullish continuation pattern. Therefore, I think the odds favor a bullish resolution and an upside breakout.

Gold and Gold Miners Break Out

The Gold SPDR (GLD) and Gold Miners ETF (GDX) finally broke above their resistance zones and reversed their downtrends. In contrast to XES (below), GLD and GDX started their downtrends from 52-week highs and after big advances. Moreover, both formed falling wedge patterns and these declines looked like corrections within bigger uptrends. This week’s breakouts ended the corrections and signaled a continuation of the bigger uptrends.

UUP Goes Ex-dividend

The Dollar Bullish ETF (UUP) went ex-dividend (.5261) on Monday and this caused a big gap on the chart. I normally do not adjust for ordinary dividends, but perhaps an annual dividend that causes the biggest 1-day decline in four years needs adjusting. In any case, I think the Dollar Index is a better representative of the greenback and it does not have a dividend to distribute.

The second chart window shows the US Dollar Index ($USD) peaking in late September and falling with a channel into December. The Dollar Index was clearly weaker than UUP before the dividend as it broke the 200-day SMA in mid December. The immediate trend is down for the Dollar and this could help precious metals (GLD, SLV) and foreign ETFs (IEMG, EFA).

TLT Extends Correction

The S&P 500 SPDR (SPY) bottomed in August and started its advance in September, which is when the 20+ Yr Treasury Bond ETF (TLT) peaked and started its decline. Money basically moved out of safe-haven bonds and found its way into riskier assets (equities). The decline in TLT still looks like a correction within a bigger uptrend, but the immediate trend is the most important trend right now and it is down. A breakout at 142 is needed to reverse this downtrend and signal a resumption of the bigger uptrend.

Oil & Gas Equipment & Services ETF Hits No Man's Land

The energy-related ETFs are leading the stock market over the last five weeks with big gains, but they are lagging over the last six months. In fact, XES, XOP and FCG up double digits since late November, but they are still down double digits since late June. Thus, they are leading short-term and lagging long-term (six months). Furthermore, the recent surge started from 52-week lows and these three are still below their falling 200-day SMAs. They are short-term overbought and in long-term downtrends. This is not a good setup for long positions.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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