Rails Drive Transports Higher, Copper ETF Throw Back to Breakout, Infrastructure ETF Challenges August Highs, Steel ETF Stalls (Premium)

This commentary is an addition to Thursday’s ETF report. ETFs in today’s commentary formed long corrective patterns from spring to fall and made various breakout attempts here in October. The Transports ETF is the leader with a strong move above the August high. The copper and base metals ETFs surged and then fell back to their breakout zones. The industrials, infrastructure, materials and housing ETFs have short-term upswings working and a challenging their August highs. The last ETFs are dragging their feet here in October and the weakest of the lot.

Long Falling Wedge Correction and Breakout


The Transports ETF (IYT) is based on the Dow 20 Transports, which is a price weighted average. This means the stocks with the highest prices carry the most weight. Union Pacific (UNP) and United Parcel Service (UPS) are the highest price stocks in the Dow Transports and they weigh around 17% each. Two stocks account for around a third of IYT. CSX Corp (CSX), Norfolk Southern (NSC) and Kansas City Southern (KSU) are also railroads and these three account for around 18% of the ETF. These five stocks are up between 17.46% (UPS) and 23.62% (UNP) here in October and powering IYT.

These stocks, and IYT, are short-term overbought, but the breakout in IYT is long-term bullish. The chart below shows IYT retracing 33-50 percent of the prior advance with a falling wedge back to the rising 200-day. The retracement, pattern and return to the 200-day are all hallmarks of a correction within a bigger uptrend. The IYT breakout signals an end to the correction and a resumption of the bigger uptrend.

Long Correction, Breakout and Throwback


The copper-related ETFs and the DB Base Metals ETF (DBB) surged into mid October and then fell back pretty hard the last two weeks. The bigger trends are up and this implies that pullbacks present opportunities. The first chart shows the Copper ETF (CPER) with a long channel/wedge and breakout with a big surge. The blue shading marks a breakout zone and price fell back to this zone, which becomes support. The pullback was quite fast so the Momentum Composite has yet to become oversold. StochRSI is below .20 and we can watch for a pop above .80 to signal a short-term momentum thrust. The other charts show COPX and DBB falling back into their breakout zones.

The Momentum Composite aggregates signals in five momentum indicators. RSI(10) is oversold below 30 and overbought above 70. 20-day StochClose is oversold below 5 and overbought above 95. CCI Close (20) is oversold below -200 and overbought above +200. %B (20,2) is oversold below 0 and overbought above 1. Normalized ROC (10) is oversold below -3 and overbought above +3. Normalized ROC is the 10-day absolute price change divided by ATR(10). -3 means three of the five indicators are oversold and +3 means three of the five are overbought.

The Momentum Composite and StochClose are part of the TIP Indicator Edge Plugin for StockCharts ACP. Click here for more details.

Short-term Upswing within Bigger Correction (multi-month)


ETFs in this next group have long corrective patterns working over the last few months, but they broke out with surges here in October. They are not as strong as the ETFs above because they have yet to clear their August highs. This means they are not as strong as ETFs that hit new highs in October or ETFs that cleared their August highs. Nevertheless, we are seeing short-term breakouts and short-term upswings within these larger corrective patterns. These short-term breakouts reversed the downswings within the bigger patterns and provided the early bird bullish signal. Further follow through with breaks above the August highs would trigger the trend-following breakouts.

The chart below shows XLI surging 42% in six months and correcting with a long falling channel since May. The decline retraced just over a quarter of the prior advance and XLI found support near the rising 200-day. After firming from late September to early October, XLI broke short-term resistance on October 15th and is currently challenging the upper line of the falling channel. Note that this channel represents a big correction and a breakout would signal a continuation of the preceding advance (42%).

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

Underperforming in October


The next three ETFs also have big correction patterns, but they are struggling here in October and this is a concern. The Steel ETF (SLX) sports a similar corrective pattern and the ETF is also finding support near the rising 200-day SMA. SLX surged 128% and then fell 20% from its high. This is another one of those obscene advances followed by a long correction. The green arrows show when the Momentum Composite hits -3 or lower. SLX is attempting to bounce from oversold levels, but this bounce is quite tepid and SLX is lagging here in October. Relative weakness and a tepid bounce are yellow flags so watch this one closely. I am still giving SLX the benefit of the doubt (bullish), but a close below 55 would be warrant a re-evaluation.

Thanks for tuning in and have a great day!

-Arthur Hill, CMT
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