ETF Ranking and Grouping – A Short-term Shift to the Laggards and Bollinger Band Breakouts

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The leading ETFs took a breather over the past week and the laggards picked up the slack. The Nasdaq 100 ETF and Technology SPDR are down slightly, while the Regional Bank ETF and Metals & Mining SPDR are up sharply. Even though the rotation into the lagging groups may seem healthy, keep in mind that the Technology sector is still the biggest driving force in the S&P 500. A correction in overextended tech stocks would most certainly weigh on the broader market. Today we will look at correction targets for QQQ and examine the Bollinger Band breakouts in more detail.

Plotting the Leaders and Laggards

The scatter plot shows the ETFs in the core list with StochClose (125,5) on the y-axis and RSI(14) on the x-axis. StochClose captures the trend. ETFs in the upper third are in uptrends and leading, while those in the bottom third are not in uptrends and lagging. RSI captures varying degrees of overbought and oversold.

There are 22 ETFs with StochClose values above 90 and these represent the strongest uptrends or leaders (AGG, SLV, GLD, XLY, SOXX, XLK, IBB). There are still a handful of ETFs with StochClose values below 40 and these are still in downtrends and lagging overall (KIE, XAR, XLE, XOP, KBE, KRE, UUP).

The table below shows the top 22 ETFs as ranked by StochClose. The y-axis column shows the StochClose value and the x-axis column shows the RSI value. Technology, biotech and healthcare dominate the leadership pack. However, the top four ETFs are considered stock alternatives. The Aggregate Bond ETF (AGG) and Corporate Bond ETF (LQD) are benefiting from Fed buying, gold is benefiting as an alternative to fiat currencies with expanding debt burdens and silver is riding gold’s coattails.

Rotation from Laggards to Leaders

We have seen a rotation over the past week from the leaders to the laggards. The PerfChart below shows the 4-day Rate-of-Change for eight ETFs. Notice that the Regional Bank ETF (KRE), Metals & Mining SPDR (XME), Industrials SPDR (XLI), Finance SPDR (XLF) and Russell 2000 ETF (IWM) are up over 5%. Meanwhile, the Technology SPDR (XLK), Nasdaq 100 ETF (QQQ), Semiconductor ETF (SOXX), Software ETF (IGV) and Cloud Computing ETF (SKYY) are down during this timeframe.

New 52-week Highs

BOTZ, TAN, IBB, XBI, IHI, AGG, LQD, SLV

The Biotech ETF (IBB) and Biotech SPDR (XBI) were already leaders and the Medical Devices ETF (IHI) joined the group with a new high on Wednesday. The chart shows IHI moving above the 200-day SMA in mid April and then stalling into late June. Price action narrowed into late June and a pennant took shape. Even though the pennant formed after the stall, I viewed the entire stall as a bullish continuation pattern because price was above the 200-day SMA. A consolidation within an uptrend is often the pause that refreshes and the pennant breakout signaled a continuation higher.

The indicator windows show a mild mean-reversion setup and momentum pop. Keep this setup in mind because it triggered on several charts over the last two weeks. RSI firmed in the 40-50 zone in June. This zone represents a mild oversold condition and an area that marks momentum support sometimes. StochRSI surged above .80 on June 30th and this represents a momentum upthrust, which is bullish.

The next chart shows the Biotech SPDR (XBI) surging to a new high, consolidating and breaking out in mid June. The ETF hit a new closing high on Wednesday, but fell just short of an intraday high. The indicator windows show RSI hitting the 40-50 zone in mid June and StochRSI popping above .80 on June 18th.

Near New High and Small Flag/Pennant

GDX, GLD

The Gold SPDR (GLD) and the Gold Miners ETF (GDX) are also leading with new highs last week. Both stalled the last five days with GLD forming a small pennant, which is a bullish continuation pattern. The first chart shows GLD surging, consolidating and breaking out in late June. The second shows GDX surging to a new high in mid May, correcting with a falling flag and breaking out in late June as well. Again, notice how RSI firmed in the 40-50 zone and StochRSI surged above .80 around June 10th.

Bearish Engulfing near 52-week High

QQQ, MTUM, XLK, XLC, SKYY, HACK, FINX, FDN, SOXX, IGV

Tech-related ETFs dominate this next group as they hit new highs on Monday, but also formed big bearish engulfing patterns. These bearish engulfing patterns also marked an uptick in volatility as the high-low range expanded. In other words, these were BIG bearish engulfing patterns. As a percentage of the close, QQQ’s high-low range was 4.59% on Monday. This is the highest level since April 2nd and reflects an uptick in volatility, which is not positive. The bottom indicator window shows ATR(22) remaining elevated and moving above its 20-day SMA. This also shows an uptick in volatility.

Note that QQQ is up over 50% from its March low and the last pullback that was greater than 5% occurred on April 1st (closing prices). QQQ has basically moved straight up the last two and a half months. The trend is clearly up and QQQ is still a leader, but it is also ripe for a rest or a correction and could pull back to the 240-245 area.

Around 80 stocks from the Nasdaq 100 are also in the S&P 500 and the top four account for 20% of the S&P 500 (AAPL 6%, MSFT 6%, AMZN 4.9% and GOOGL 3.4%). This is a crazy high concentration. It is not negative or positive in and of itself, but it shows just how dependent the S&P 500 is on just four stocks. FB (2.2%) is the fifth largest stock in the S&P 500.

And finally…earnings season is underway and the big five report in the coming weeks: MSFT (22-Jul), AMZN (23-Jul), FB (29-Jul), GOOGL (30-Jul) and AAPL (30-Jul). These stocks are priced at pre-covid levels or higher and expectations are quite high. I am not an earnings specialist and the markets are forward looking, but risk appears above average in the weeks ahead.

The next chart shows five tech-related ETFs and they will most likely follow QQQ. The Internet ETF (FDN) and Software ETF (IGV) are the furthest above their February highs and sport the strongest price charts. The Semiconductor ETF (SOXX), FinTech ETF (FINX) and Cyber Security ETF (HACK) consolidated in June with pennants and broke out in early July. These breakouts were immediately challenged with Monday’s long black candlesticks. Regardless of the patterns, all five are quite extended and ripe for a corrective period.

Above Rising 200-day and June Breakout

TLT

The 20+ Yr Treasury Bond ETF (TLT) broke out in mid June and remains in a long-term uptrend. I am showing a weekly chart today. TLT fell from late April to early June as stocks advance, but then reversed near the 61.8% retracement line with a big bullish engulfing. TLT followed through and broke out and this breakout is largely holding. I am marking first support at 160 and will stay bullish on bonds as long as this level holds.

Above 200-day and Pennant/Flag Breakout

SPY, XLY, XLV, XLB, IPAY, ITB, XHB, XRT, IHF, EFA

The next group of ETFs are above their 200-day SMAs and have pennant or flag breakouts working. These ETFs are bullish right now, but close to their 200-day SMAs and should be watched closely. Failed breakouts would be negative and breaks below the June lows would be bearish.

The first chart shows SPY with a pennant breakout and this breakout largely holding. Notice how the ETF consolidated near the breakout zone and moved higher the last two days. This establishes first support at 310 and a close below this level would show cold feet because a strong breakout should hold. The June lows and 200-day mark key support in the 296-300 area. A close below this zone would reverse the medium-term uptrend, which started with the late March surge.

The next chart shows the Healthcare SPDR (XLV) with a setup similar to the Medical Devices ETF: a consolidation above the 200-day and a breakout. XLV is just short of a 52-week high, but the trend is up and the breakout points to a new high sooner rather than later.

The next two charts show the Home Construction ETF (ITB) and Retail SPDR (XRT) with pennants above their 200-day SMAs and breakouts. These two should be watched closely because they are very representative of the domestic economy. Their trends are up and the breakouts are currently bullish. A strong breakout should hold and a close below Tuesday’s low would negate the breakout. A close below the June lows would break support, break the 200-day and reverse the medium-term uptrend.

Bollinger Bands and Head Fakes

Before looking at the next group, I would like to review Bollinger Bands and head fakes. In theory, a volatility expansion follows a volatility contraction. A Bollinger Band signal triggers when the bands narrow and price breaks one of the bands. Bollinger Bands do not provide a directional bias, they just show when volatility is contracting or expanding. Chartists must use other indicators to establish a directional bias. For example, the bigger trend is up when above the 200-day SMA and this gives us a bullish bias.

The chart below shows the Biotech ETF (IBB) above its 200-day with the Bollinger Bands narrowing in mid June. Price broke below the lower band and this was confirmed when %B moved below 0. This break, however, turned out to be a “head fake” because it did not hold and price broke above the upper band. Notice that %B exceeded 1 when price broke the upper band. John Bollinger talked about head fakes in is book, Bollinger on Bollinger Bands.

There are quite a few Bollinger Band contractions and breakouts on the charts this week. A breakout (signal) is bullish until proven otherwise and we need to watch these closely. The chart below shows IWM with the Bollinger Band squeeze and breakout on Wednesday. This is bullish, but there is always the possibility of a head fake breakout. IWM was below the 200-day before the breakout and closed above this key moving average on Wednesday. A close below 141 would fill Wednesday’s gap and argue for a re-evaluation. A close below the lower band would trigger a bearish signal.

Bollinger Band Breakout Near 200-day

RSP, MDY, IJR, IWM, USMV, XLI, VIG, HYG

The next charts show the S&P 500 EW ETF (RSP), Industrials SPDR (XLI) and High-Yield Bond ETF (HYG) with short-term breakouts and 200-day SMAs in play. RSP and XLI sport Bollinger Band breakouts and both are near their 200-day SMAs. Failure to hold these breaks and a move below the June low would be bearish.

HYG is a little different. It is below its 200-day SMA and broke the lower Bollinger Band on June 26th. The current trend down and the Bollinger Band signal is bearish. Here is where the subjective nature of technical analysis comes into play. The June decline looks like a falling flag and HYG broke out of this pattern. RSI bounced off the 40-50 zone and StochRSI surged above .80 on June 10th. This looks bullish.

Corporate bond ETFs are tricky because the Fed is active in the bond market. The flag breakout is valid as long as last week’s low holds. A break below this low would negate the breakout. This would be especially negative because the ETF is below its falling 200-day and the bearish Bollinger Band signal is still active.

Bounce off Support and Breakout

XME, REMX, IEMG

Some rising wedge breaks were put on hold as short-term support levels held and price broke short-term resistance. The chart below shows the Metals & Mining SPDR (XME) breaking the lower line of the wedge, which is subjective. Price found support near broken resistance and the 61.8% retracement and RSI stabilized in the 40-50 zone. Note that RSI turned up and StochRSI surged above .80 last Friday. This move reinforces support from the June lows and the bulls have an edge as long as they hold.

Stalling Since April

XLP, XLU, XLRE, IYR, PFF

The Consumer Staples SPDR (XLP) sprang to life in July with a bounce off support and StochRSI thrust above .80 on July 6th. Even so, this is still one of the weaker sectors since mid April and it remains well below the February high.

Below 200-day and Reversal at Key Retracement

XLF, KBE, KRE, KIE

The Finance SPDR (XLF) and Regional Bank ETF (KRE) perked up over the last four days, but they are still big laggards over the last four months. Caution is advised because the longer-term downtrends and relative weakness could take over. The first chart shows XLF failing at the falling 200-day in early June and falling back to the 23 area. Broken resistance and the 61.8% retracement combine to mark support in this area and RSI also firmed in the 40-50 zone. XLF broke out as StochRSI surged above .80 on July 10th. A close below 23 would negate the short-term breakout and a close below last week’s low would break channel support.

Bounce, but Well Below Falling 200-day

XLE, REM, XAR, MJ, FCG, XES, XOP, AMLP

The Energy SPDR (XLE) got a nice bounce the last four days, but it is still one of the weakest ETFs overall. XLE did not make it back to the falling 200-day SMA and failed near the 61.8 retracement line. The ETF broke down in late June and became somewhat oversold last week. The four day bounce is impressive in percentage terms, but the bigger downtrend is the issue here.

Thanks for tuning in and have a great day!

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