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Grouping and Ranking Core ETFs – Meet the New Leader, Same as the Old Leader

There is a new ranking system in town, and it captures the essence of the old ranking system. Note that you can view the ranked ETFs in the PDF link above. Each ETF also includes a short note about its chart.

Click here for an article and video explaining [1] the methodology behind the indicator. This article includes backtest results for a trend following system and a ETF rotation strategy.

I have been working on a systematic ranking system based on indicator values for most of my life, and in particular the last few weeks. I experimented with RSI, Rate-of-Change, the Fast Stochastic Oscillator, Percent above Moving Average and more. I always seem to gravitate back to the Fast Stochastic Oscillator (FSO) because it reflects the level of the close relative to the high-low range over a given period. I will cover the methodology in more detail with an article and video early next week. For now …

  • FSO measures the close relative to the high-low range over a lookback period (XX days)
  • FSO = (Close – Lowest Low XX days) / (Highest High XX days – Lowest Low XX days) * 100

A 125-day Fast Stochastic value at 99 means the ETF is trading near a six month high, and possibly a 52-week high (see IHF chart below). 125 days is around six months. A value below 10 means the ETF is trading close to a six month low, and possibly a 52-week low (see MJ).

  • FSO(125,1) > 90 (ETF near 6-month high and possibly near 52-week high)
  • FSO(125,1) < 10 (ETF near 6-month low and possibly near 52-week low)

I then take a weighted average of five timeframes for the Fast Stochastic Oscillator (25, 50, 75, 100 and 125 days). 25 days is around a month, while 125 days is around six months. The weightings start at 10% and increase by 5% as the timeframe lengthens. The 25-day FSO weighs 10% and the 125-day FSO weighting grows to 25%.

  • AvgFSO = Weighted Average of Fast Stochastic Oscillator (FSO)
  • FSO(25,1)*10% + FSO(50,1)*15% + FSO(75,1)*20% + FSO(100,1)*20% + FSO(125,1)*25%

The result is the Weighted FSO Score (AvgFSO). ETFs with scores above 95 are very strong on several timeframes (QQQ, XLK, SKYY, IGV, IHI). ETFs with scores below 30 are weak on several timeframes (TLT, UUP, MJ). In the current rankings, 37 ETFs scored above 80 and are strong on several timeframes (near their highs for each timeframe).  

As with any ranking system, there will be gray zones and the structure of the price chart may not always jibe with the ranking. For example, the Real Estate SPDR (XLRE) is near the bottom of the ranking with a score of 41. However, the ETF is above its 200-day SMA and broke out of a falling wedge pattern last week. More on this one later…

The following ETFs are still grouped by their patterns at work.

ETFs to Watch

  • XLY stalled with a small 8-day flag above its breakout.
  • XLB is testing broken resistance with a throwback in early January.
  • XLU has a bullish consolidation working and XLRE broke out of a wedge.
  • ITB and XHB are breaking out within their consolidation patterns.
  • KIE remains in a boring uptrend and ITA is holding its wedge breakout.

New Highs and Leading

QQQ, XLK SKYY, IGV, IPAY, HACK, XLV, XLI, IHI

Tech-related ETFs are leading the charge here in 2019 with fresh 52-week highs in the Nasdaq 100 ETF (QQQ), Technology SPDR (XLK), Cloud Computing ETF (SKYY), Cyber Security ETF (HACK), Software ETF (IGV) and Mobile Payments ETF (IPAY). QQQ and XLK have not rested much and simply extended higher the last five weeks. The chart below shows QQQ with a three day dip in early December and then a 7.7% advance to new highs this week.

SKYY and HACK rested with bullish consolidations in December. Remember, a consolidation within an uptrend is typically a bullish continuation pattern. It represents the pause that refreshes. SKYY broke out of a small Ascending Triangle as RSI bounced off the 40-50 zone. HACK formed a pennant and broke out with a gap-surge on January 2nd. Also notice that RSI bounced off the 50 level.

Flag/Pennant Breakouts

XLV, IBB, XBI, IHF

The Healthcare related ETFs pulled back rather hard at the beginning of the year, but a hard pullback can be expected after such a strong advance in the fourth quarter. The Healthcare SPDR (XLV), Biotech ETF (IBB) and Biotech SPDR (XBI) formed falling flags and broke out of these flag patterns with a surge on Wednesday. Notice that RSI(10) dipped into the 40-50 zone last week for all three. This represents a mild oversold condition that can give way to a bounce. The flag breakouts are bullish as long as they hold. A close below Monday’s close would negate these breakouts. Admittedly, I have my reservations on these three because they are still up substantially since early October and could be vulnerable to a more extended correction.

Consolidations after New Highs

RSP, MDY, IJR, IWM

The S&P 500 EW ETF (RSP), S&P MidCap 400 SPDR (MDY), S&P SmallCap 600 SPDR (IJR) and Russell 2000 ETF (IWM) did not partake in the large-cap advance the last two weeks. They either consolidated or edged lower. Nevertheless, all five moved sharply higher in December and recorded new highs just after Christmas. They then moved into consolidation patterns. These short consolidations look like flags and flags are bullish continuation patterns. Flag breakouts would end the consolidations and signal a continuation of the December advance. Watch the banking ETFs below because the finance sector is the largest sector in IWM and IJR.

Sharp Pullbacks after New Highs

KRE, KBE, XLB

Some ETFs are pulling back harder than others. Notice how the Regional Bank ETF (KRE), Bank SPDR (KBE) and Home Construction ETF (ITB) fell pretty sharply the last two to three weeks. KRE and KBE recorded new highs in late December and then fell. XLB hit a new high on January 2nd, and then fell. XLB is at an interesting juncture because it is back near broken resistance, which turns into support. A return to the breakout zone is known as a “throwback” and this pullback offers a second chance to partake in the breakout.

KRE fell back to a bigger breakout zone. The blue zone marks resistance from the prior highs (February to September). KRE broke out with a big move in November-December, and then fell back to the upper end of this zone. A break above 58 would reverse the short-term slide and signal a continuation of the bigger uptrend at work.

Trying to Breakout out of their Rut

ITB, XHB

The Home Construction ETF (ITB) and the Homebuilders ETF (XHB) continue to put everyone to sleep with their extended consolidations. These consolidations formed after 52-week highs so they are considered bullish continuation patterns (the pause that refreshes). Signs of life are starting to appear as both reversed their slides within the consolidations. The chart below shows ITB moving sideways since late October and Bollinger Bandwidth staying low for weeks. ITB fell from early December to early January and then broke out of a smaller channel the last three days. This breakout is the early signal that could lead to a bigger breakout.

Wedge Breakouts and Ripe for a Throwback

GLD, GDX, SLV

The Gold SPDR (GLD), Gold Miners ETF (GDX) and Silver ETF (SLV) broke out of falling wedge patterns around December 24th and extended higher. GLD hit a new high this week and earned a spot in the top half of the ranking with a Weighted Average FSO of 87. GDX and SLV did not record new highs and are lagging gold in this sense. Note that GLD became quite overbought when RSI(10) exceeded 90 on Tuesday. This last occurred on June 24th and foreshadowed a two week consolidation to digest the gains. GLD was also up 7.5% since December 6th and ripe for a corrective period. The prior resistance zone around 142 turns into the first support zone to watch on a pullback. The second chart shows GDX with broken resistance and the late December low marking a support zone around 27-28.

Falling Wedge/Channel Breakouts

XLRE, IYR

2019 was the year of the falling wedge and the falling wedge breakout. We saw breakouts in IGV, SKYY, HACK, FINX, FDN, TAN, GLD, GDX and SLV. Note that all were underperforming when these wedges formed, especially in the latter stages of the patterns. Even though falling wedges are typical for corrections within bigger uptrends, these ETFs were low on the ranking tables because these pullbacks extended. IGV had an AvgFSO score of 15 on 22-Oct, the day it bottomed. Thus, do not dismiss an ETF because it is low on the ranking table. Check the chart and analyze the structure of the price movements. The rankings show us which ETFs are leading on the price charts at this moment in time.

The next chart shows XLRE with a falling wedge from 22-Oct to 13-Dec. The ETF was clearly underperforming ETFs that rose from late October to mid December. Nevertheless, XLRE found support near the rising 200-day SMA as the falling wedge formed. The ETF then bounced and broke the wedge line in late December. It looks like the wedge is reversing and this would signal a continuation of the bigger uptrend.

Just because several falling wedge breakouts worked in the past does not mean THIS breakout will work. Trading is about the odds and the next 100 trades. The odds favor further gains because the bigger trend is up and this is a bet on a continuation. I think this pattern would lead to further gains at least 50% of the time. Moreover, I think the reward-to-risk ratio is quite good with falling wedges. The low of the wedge can be used for a stop, while the breakout argues for a move to at least the prior higher, if not a new high.

Below the 200-day SMA

XLE, XES, XOP, FCG, AMLP

It has been a wild ride for the energy-related ETFs the last two weeks as oil surged 3% on January 3rd and then preceded to fall around 5% the last four days. The Oil & Gas Equipment & Services ETF (XES) led the market in December, but turned back near its 200-day and looks ripe for a rest. Elsewhere, the Energy SPDR (XLE) failed near the 200-day SMA for at least the fourth time since April. The ETF gapped down on December 30th, bounced and then fell again. This price action prompted a redraw of the chart and I am now focused on a bearish wedge. XLE is testing support now and a break below 59 would signal a continuation lower.

Falling Wedges (still)

TLT, AGG

The Aggregate Bond ETF (AGG) and 20+ Yr Treasury Bond ETF (TLT) are bringing up the rear on the ranking table because they have been trending lower since September (four months or 90 something days). TLT is also closer to its July low than its September high. This means the cup is half empty over the last six months. TLT attempted a breakout last week with a surge above 138, but resistance from the bigger wedge prevailed as the ETF fell back the last four days. This move re-enforces resistance at 140 and the trend is down as long as this level holds.

Thanks for tuning in and have a great day!