This commentary was originally posted on Wednesday, March 17th, in PDF format. Today I am replacing the PDF with chart images on a web page. Some of the text has been adjusted, but the commentary/charts are largely the same as on Wednesday. These charts cover the massive moves in tech-growth ETFs over the past year, the interest rate debate, Chinese ETFs firming in reversal zones and the Brazil ETFs surging off the 200-day.
Growth ETFs, Massive Moves and Corrections
QQQ, XLK, SKYY, HACK, IGV, PBW
I realize that the media and some respected analysts attribute the fall in growth stocks to the rise in interest rates. I recently heard Craig Johnson of Piper Sandler (video) and Joe Kalish of Ned Davis Research (article) suggest that tech stocks could struggle if the 10-year yield rises to the 2% area. I do not want to be on the other side of the trade from these two peers, who I greatly respect. Nevertheless, keep in mind that there are periods when the Equal-weight QQQ ETF (QQEW) advance along with doubling of the 10-yr yield. The chart shows three times when QQEW advanced (dashed blue lines) and the 10-yr yield more than doubled (green time/price measure).
Personally, the 10-year yield is not my first point of call when analyzing QQQ, XLK, SKYY, IGV, HACK, PBW and other tech-growth ETFs. The chart is my first point of call and they are lagging/correcting. First, they broke below their late January lows during the February decline. Second, they have yet to exceed their March 1st highs. Despite a bounce over the last several days. Even with the decline from the February highs, these five are up between 80% (HACK) and 334% (PBW) over the past year (250-day ROC). A four to twelve week correction is still pretty normal.
StochRSI for Momentum Pops
The indicators on this chart are the 200-day SMA in red, RSI(14), StochRSI(10) and StochClose (125,5). The 200-day and StochClose define the long-term trend. StochClose (bottom window) is shaded green when bullish and unshaded when bearish. RSI is used to identify oversold conditions when it dips into the 30-50 zone (turns blue). Once RSI is short-term oversold, StochRSI is used to identify momentum pops with a move above .80 (green circle). A momentum pop is the first sign that the correction is ending.
The chart above shows the last three StochRSI pops (vertical green lines) with the ATR Trailing Stops (red lines). The September pop resulted in a breakeven trade, the early November pop resulted in a big winner and the mid February pop resulted in a small loss. Admittedly, I would not have taken the February signal because it occurred well after the flag breakout and with QQQ at a new high. Currently, QQQ has a StochRSI pop and flag breakout working. These are bullish until proven otherwise. A close below 310 would negate the breakout and warrant a re-assessment. The ATR Trailing Stop is also at 310 now.
The Medical Devices ETF (IHI) shows signs of ending its pullback and resuming its uptrend. The long-term trend is up because IHI hit a new high in mid February, price is above the 200-day SMA and StochClose has been bullish since mid April. IHI fell back the last few weeks with a rather steep falling flag type pattern and RSI dipped deep into the oversold zone (turned blue). The ETF is now in the process of breaking out of the flag and StochRSI popped above .80 last week. This represents a momentum pop that can jump start a breakout.
Charting Asian ETFs with Heikin Ashi
FXI, ASHR, KWEB, CQQQ, EWY, EWJ
Chartists can smooth price action in “gappy” ETFs by using Heikin-Ashi candlesticks. Many foreign ETFs, especially those traded in Asia, react to price movements that occurred well before the open in the US. This means prices often gap up/down when trading opens in the US. In addition, there is sometimes little movement after the gap or little change from open to close. This is because the markets are already closed in Asia. Chartists can camouflage these gaps using Heiken-Ashi candlesticks.
The term Heikin-Ashi means “average” in Japanese. As such, Heiken-Ashi candlesticks represent an average of the last two price bars. The close is the average price of the current bar (OHLC) and the open is the average of the prior open and close. The high and low are simply the high and low of the current bar.
The chart above shows the China Large-Cap ETF (FXI) with normal candlesticks in the top window and Heikin-Ashi candlesticks in the lower window. The patterns are largely the same on both charts, but Heiken-Ashi candles smooth price action and produce a clearer picture.
The next chart focuses on FXI and key indicators. The ETF is in a long-term uptrend and firming after a sharp pullback that retraced around 2/3 of the prior advance. The ETF surged with a long white candlestick, but fell back and consolidated the last five candles. The long white candlestick established first resistance with its high and a breakout at 49.50 would be bullish.
Note that indicators, breakout levels and such can be a little different when using Heikin-Ashi candlesticks. This is because the close is not just the close for the current day. Instead, the close is the average price for the day (O + H + L + C)/4. Indicators based on the average price will look slightly different than those based on the close.
I do not trade the news, but some of the tech giants with near monopolies in China are feeling the heat from Chinese regulators. This is (allegedly) why Tencent (TCEHY) fell sharply on Friday, March 12th. Keep an eye on the price charts, especially if we see upside breakouts after supposedly bad news.
The China A-Shares 300 ETF (ASHR) shows characteristics similar to FXI. ASHR is trading in a possible support zone from the November-December consolidation. The index fell sharply and then firmed in the support zone (and above the rising 200-day). Watch for a break above the red resistance line.
The South Korea ETF (EWY) is in the midst of a modest pullback after a monster surge. EWY surged some 45% from late October to early January and then worked its way lower the last few months. The correction looks like a falling channel and this decline retraced around 1/3 of the prior advance. A channel breakout would signal an end to this correction and a resumption of the bigger uptrend.
There is also is an example of a smaller downswing within a bigger decline (channel) on this chart. The dashed blue trendline defines this smaller downswing and EWY broke this line with a bounce. Also notice that StochRSI, which is based on the Heikin Ashi close, surged above .80 for a momentum pop (green circle). These are the early signs of strength that could lead to a bigger breakout.
The Japan ETF (EWJ) is a bit stronger than the other Asia ETFs because it has the highest RSI value (61.13). The price chart shows a pullback to the late January low and a breakout over the last few days. StochRSI popped above .80 on March 11th and price broke the channel line two days later.
Brazil ETF Surges off 200-day
The Brazil ETF (EWZ) firmed in a reversal zone and surged the last two weeks (normal candlesticks). EWZ was late to the party, but joined the bulls with a surge above the 200-day and above its summer highs. The ETF then fell back rather hard with a 2/3 retracement back to the 200-day (red line). The combination of the 200-day and 2/3 retracement make this a possible reversal zone. Think of it as two steps forward and one step backward. EWZ surged above the early March high last week and it looks like a breakout is in the making.
This chart also shows an example when RSI was oversold, StochRSI popped above .80 and the momentum pop failed (yellow line in early February). Sometimes signals fail. StochRSI is at it again with two pops above .80 in the last few weeks (green circle).