Grouping and Ranking Core ETFs – SPY, QQQ and Tech ETFs Lead Extension – Flag Breakouts Trigger

The bull market continues to broaden with 23 of 53 equity-related ETFs hitting new highs (56%) this week. Thus, more than half of the equity ETFs hit new highs and this shows broad strength in the stock market. Note that there are 60 ETFs in the “core” list and just 7 are non-equity (GLD, AGG, TLT, HYG, LQD, UUP, SLV). Also note that you can download this core ETF list as well as a master ETF list that has 200 symbols (click here).  

This week we saw new highs in large-caps (SPY), mid-caps (MDY), small-caps (IWM), technology (XLK), finance (XLF), healthcare (XLV), software (IGV), cybersecurity (HACK), housing (ITB), non-US stocks (EFA), biotechs (IBB) and even dividend appreciation (VIG). It is hard to argue with such broad strength.

Many stocks and ETFs are getting extended with double-digit gains since early October. Also note that QQQ is up eight of the last nine weeks, SPY is up seven of the last eight weeks, XLC, IBB, XBI and IHF are up nine weeks in a row, while SKYY and IGV are up eight of the last nine weeks. These strong moves are bullish long-term, but the risk of a pullback or consolidation is growing.

Three ETFs stand out today: XLY, TAN and XME. XLY is breaking out of a Bollinger Band squeeze with help from Amazon. TAN has a corrective pattern similar to FDN. XME has a flag breakout and Double Bottom in the works. These three are covered below and their charts are featured in the ChartBook and ChartList at StockCharts. All charts in the ChartBook and ChartList are annotated and some have extra notes below the chart.  

You are working on Thanksgiving! What gives? Yes, I am working on Thanksgiving, but I am also living and working in Belgium. The kids have school, while my wife and friends have normal working days today. Thanksgiving is not, however, lost because we will celebrate this weekend with a traditional turkey dinner. I will post commentaries today and Friday, but take off on Saturday and Sunday. It is a bit crazy because Black Friday shopping and deals are spreading to Belgium.

ETF Grouping and Ranking

There are more groups than usual today because I needed to differentiate. For example, there are flag breakouts with new highs and flag breakouts without new highs. There are consolidation breakouts with new highs and consolidation breakouts without new highs. Groups 1 through 6 are in uptrends of some sort and leading. Groups 10, 11 and 12 are lagging, but with different patterns or trends at work. Groups 7 and 9 are the most interesting because they contain ETFs that could still move.

1) Consolidation Breakout and New High:

2) Trend Resumption Breakout: SKYY, HACK, FINX, IGV, IPAY, FDN

3) Consolidation Breakout, but Shy of New High: SOXX, ITA, LQD

4) Flag/Pennant Breakout and New High:

5) Strong Advance, but Overbought: XLV, IBB, XBI, IHF

6) Flag Breakout, but Shy of New High: KBE, KRE, BOTZ

7) Stuck in Consolidation: XLY, HYG

8) Messy Chart with Emerging Uptrend: XRT, REM, IEMG

9) Possible Bullish Reversal: XME, TAN

10) Lagging, Uptrend and Oversold Bounce: XLU, XLRE, IYR, PFF, UUP

11) Lagging and Extended Falling Wedge: GDX, GLD, SLV, AGG, TLT

12) Lagging and Downtrend: XLE, MJ, FCG, XES, XOP, AMLP, REMX

1) Consolidation Breakout and New High


The Ascending Triangle breakout is now in its fifth week and SPY is up around 3.75% since the breakout. SPY is also up seven of the last eight weeks and up around 7% since early October. The ETF extended its breakout and parade of new highs with yet another all-time high on Wednesday. Traditional technical analysis would add the height of the Ascending Triangle (7.5%) to the breakout to estimate an upside target. A 7.5% advance from 302 would extend to the 324-325 area. This seems a bit much to do without a pullback, but anything is possible.

The Technology SPDR (XLK) broke out of a Symmetrical Triangle in late October and this triangle measures around 10%. A 10% gain from the breakout zone (82) would target a move to around 90. XLK is currently at 88.42 and this suggests limited upside before a pullback. Broken resistance turns support in the 82-83 area. However, as with SPY, QQQ and other ETFs, I doubt if a pullback will make it back to the breakout zone because buyers are likely to step in earlier.

2) Trend Resumption Breakout


I placed the trend resumption breakout group second because these ETFs are continuing their uptrends from the first half of the year. After leading from January to July, these tech-related ETFs lagged from August to October as they retraced a portion of the prior advance with corrections (falling wedges). The recent breakouts ended these corrections and signaled a resumption of the prior uptrends. HACK and IGV are leading with new highs this week, while SKYY is very close to a new high. FINX and IPAY took off the last two weeks and appear destined to hit new highs.

The Internet ETF (FDN) finally joined the party with a breakout on Monday. The ETF was lagging in November, but the overall chart pattern looked constructive (two steps forward and one step backward). The ETF broke out of the six week consolidation on Monday to signal follow-through to the wedge breakout.

3) Consolidation Breakout, but Shy of New High


The Semiconductor ETF (SOXX) broke out of an Ascending Triangle in early November and hit new highs. The ETF then formed a flag and provided us with a great example of a busted flag followed by a mean-reversion bounce. The flag breakout failed as SOXX dipped below 230 last week. However, RSI(10) hit the 40-50 zone, which is the first area to watch for a short-term bounce. SOXX got that bounce this week. Moral of the story: the market trend, sector trend and long-term uptrend in SOXX prevailed over the failed flag.

The Corporate Bond ETF (LQD) is leading the bond ETFs and got a big upgrade this week with the triangle breakout. Note that LQD formed a triangle (higher low) when AGG and TLT formed lower lows (falling wedges). LQD just broke out of the triangle and exceeded the early November high to signal a continuation higher.

4) Flag/Pennant Breakout and New High


Flags are bullish continuation patterns that form after a sharp advance. Flags can be flat with a sideways consolidation or move lower with a slight pullback. Either way, they represent a rest that alleviates overbought conditions and provides the pause that refreshes. This week we saw strong flag breakouts in the S&P MidCap 400 SPDR (MDY), S&P SmallCap 600 SPDR (IJR) and Russell 2000 ETF (IWM).

The first chart shows MDY with RSI(10) dipping just below 50 before the flag breakout. An RSI dip to the 40-50 zone is the minimum expected during a short-term consolidation or pullback. MDY held the flag lows last week and RSI held the 40-50 zone with a pop and breakout this week. With such a strong breakout, I would watch the breakout zone for the first signs of failure. A close below 365 would warrant a re-evaluation of the short-term situation, but this would not be enough to reverse the bigger uptrend at work. Keep in mind that MDY, IJR and IWM recorded 52-week highs this week.

5) Strong Advance, but Overbought


The Healthcare SPDR (XLV), Biotech ETF (IBB), Biotech SPDR (XBI) and Healthcare Providers ETF (IHF) continued their extraordinary runs with further gains this week. XLV is up 12.50% over the last forty days, while IBB, XBI and IHF are up over 20%. XLV and IBB hit new highs. XBI and IHF are just short of 52-week highs. The chart shows IBB breaking out as RSI(10) moved above 70 in late October. The ETF never looked back as the advance extended from 106 to 119 in November. Nothing to do here but watch and wait.

6) Flag Breakout, but Shy of New High


The Bank SPDR (KBE) and Regional Bank ETF (KRE) broke out of their falling flag patterns this week, but did not record new highs. This does not make them weak, it just means they are a little less strong than ETFs that hit new highs this week. Nevertheless, the flag breakouts are bullish, new highs are not far off and I would expect new highs to follow because the bigger trends are up.

7) Stuck in Consolidation

  • XLY, HYG

XLY broke out of its funk with a move above the upper Bollinger Band, after a Bollinger Band squeeze. AMZN, which accounts for 22.3% of the ETF, broke above its 200-day SMA and exceeded its early November high for a breakout. Cyber Monday is coming! Notice how the ETF dipped below the lower Bollinger Band for a head-fake last week and then broke the upper band this week for a breakout. John Bollinger explained this head-fake in his classic book, Bollinger on Bollinger Bands. The next test is the upper line of the Ascending Triangle. A breakout here would forge new highs and signal a resumption of the bigger uptrend.

8) Messy Chart and Emerging Uptrend


Black Friday is tomorrow and the Christmas season is around the corner. Actually, judging from the advertising and decorations since the day after Halloween, one would think Christmas was within a week. XRT is getting in the spirit with a break above the 200-day SMA in mid October and a breakout hold in November. This chart is bullish, but it is not my favorite looking chart because the uptrend is relatively new and this ETF trades quite choppy.

HYG is lagging because it is flat the last seven weeks and down slightly the last three weeks. Junk bonds are supposed to act more like stocks, but they are not keeping pace as HYG remains short of a breakout. Even though HYG moved below its 200-day, I would prefer to focus on the fact that RSI is near 30 and the ETF is getting short-term oversold. These conditions could pave the way for a bounce.

9) Possible Bullish Reversal

  • XME, TAN

The Metals & Mining SPDR (XME) and the Solar Energy ETF (TAN) are at different trend stages, but both could be poised for bullish reversals. XME could be reversing a downtrend, while TAN could be reversing a corrective decline. XME got a flag breakout and looks poised to challenge Double Bottom resistance. The ETF also edged above its 200-day. A break above the September high would confirm the Double Bottom and reverse the bigger downtrend. Note that XME is 51% steel and I will highlight some steel stocks on Friday (RS, CMC, STLD, ATI, NUE, X, AKS, CLF, HCC, CRS, WOR, SXC, SCHN, HAYN).

The TAN chart looks similar to the tech-related ETFs in early October (IGV, HACK, IPAY). TAN surged some 80% and then corrected from August to November. The ETF lagged during this correction and broke below the summer lows, which is when it was downgraded. Even though the falling wedge is a bit narrow for my taste, the structure of the chart still looks bullish. Think two steps forward (+80%) and one step backward (38% retracement). TAN bounced off the rising 200-day SMA this week and a follow-through breakout at 28.6 would be bullish.

10) Lagging, Uptrend and Oversold Bounce


Keep in mind that I group these ETFs by trend, pattern and setup, which is how we trade or invest. That is why the REIT ETF (IYR) is together with the Dollar Bullish ETF (UUP). I look at their charts and see a similar setup. They are lagging the top six groups for sure, but they are still in uptrends overall and mean-reversion bounces are currently underway. A mean-reversion bounce occurs when RSI(10) dips below 30 or touches 30 and then turns up. Price moved below the trend mean when RSI reached 30 and the bounce signals a reversion to that mean. IYR actually looks pretty strong still with a nice recovery after last week’s dip and move higher the last three days.

11) Lagging and Extended Falling Wedge


The Gold SPDR (GLD), Gold Miners ETF (GDX) and 20+ Yr Treasury Bond ETF (TLT) have the same patterns at work. After trending higher and leading in July and August, they fell with falling wedges the last three months. Technically, the falling wedge is a corrective pattern and a breakout signals an end to the correction. A breakout also signals a resumption of the prior advance and projects a move to new highs. These patterns look similar to the falling wedges seen in IGV and FINX before their breakouts.

Even though the wedge looks corrective and could be a nice bullish setups, there are three problems with gold and bonds right now. First, the bull market in stocks is broadening and this makes alternatives less appealing. Second, the wedges are still falling and this means the immediate trends are down. Third, they are seriously lagging because they fell when others moved to new highs. TLT is close to a breakout. GLD needs to break at least 139 before becoming interesting.

12) Lagging and Downtrend


The remaining seven ETFs are in clear downtrends and lagging. Energy-related ETFs are somewhat intriguing because oil is above its 200-day SMA and the bull market in stocks is broadening. I drew a flag in XLE two weeks ago and it failed. I am drawing a second one this week and noting the break above the upper line last Thursday. XLE fell back the last four days, but I would watch for a follow through break above the red resistance zone.

Thanks for tuning in and have a great Thanksgiving!

-Arthur Hill, CMT
Choose a Strategy, Develop a Plan and Follow a Process

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