Understanding the ETF Grouping and Ranking Report

The video above and article below explain the methodology behind the ETF Grouping and Ranking report, which is published every Thursday. The idea is to group ETFs based on a combination of chart patterns and chart performance. Chart patterns provide us with setups and signals for trading, while chart performance separates uptrends from downtrends and leaders from laggards.

I typically group ETFs with similar trend structures, chart patterns and chart performance together, and then rank these groups. Sometimes an ETF chart is not a “perfect” fit for their group, but I must allow for some flexibility to keep the number of groups to around ten.

The groups are ranked with the leading groups at the top and the lagging groups at the bottom. In general, I avoid ETFs in groups that are in downtrends and lagging. Sometimes the candidate pool is large and over 40 ETFs can be considered as viable trading candidates. This was the case in November 2019. Sometimes the candidate pool is small and less than ten ETFs can be considered as viable trading candidates. This would likely occur in a bear market. Note that I am only considering long positions.

Some ETFs may be in relatively new uptrends (a few months), while some may be in established uptrends (six or more months). An ETF hitting a 52-week high and trending higher for six or more months would usually be ranked higher than an ETF that is hitting a 13-week high and trending higher for three months. Even though the longer uptrend would receive the higher rank, there is no guarantee that it will outperform the lower ranked ETF, which is also in an uptrend.

This is where nuance and personal preferences come into play. We need to study the charts and find setups that suit our trading or investing style. TrendInvestorPro provides the ETF Grouping and Ranking report, which includes detailed chart analysis and setups. Individuals must then find the ETFs that fit their trading/investing strategy, time frame and risk appetite.

Even though I approach chart analysis in an objective manner, there is still some subjectivity involved when "looking" at charts and making assessments.

To Adjust or not to Adjust

Before looking at more chart examples, note that I prefer price data that is NOT adjusted for ordinary dividends, but is adjusted for capital reconstructions, splits and one-time distributions. Dividend adjustments occur after the fact. For chartists looking at dividend adjusted data, this means the price data you are looking at in the present will be adjusted and change when the dividend is added back. This means the signals you see now, or saw a few weeks ago, might not be the same after the adjustment. StockCharts users must precede their symbols with an underscore (_XLRE) to see unadjusted price data.

Chart Performance Examples

Chart patterns are pretty self explanatory, but what is “chart” performance? I could rank the ETFs by a momentum metric, such as Rate-of-Change, but this would penalize ETFs with boring uptrends and relatively low volatility. The Consumer Staples SPDR (XLP) comes to mind as an ETF with a steady and boring uptrend. XLP is underperforming the high-octane Technology SPDR (XLK) in percentage terms, but it’s uptrend is just as strong because it is consistently moving higher.

At its most basic, ETFs hitting new highs will be in the top ranked groups, while ETFs recording new lows will be in the bottom ranked groups. The chart below shows the Aerospace & Defense ETF (ITA) and the Oil & Gas Equipment & Services ETF (XES) with three instances were ITA would have been ranked higher than XES. First, ITA moved higher from May to September and XES moved lower. Second, ITA came much closer to its October high with a strong move. XES, on the other hand, formed a bearish wedge and fell well short of this high. And third, ITA trended higher and hit new highs in the second half of 2019, while XES trended lower and hit new lows. Clearly, ITA had the stronger price chart.

Relative chart performance also comes into play. Chartists can measure relative chart performance by comparing current price action to corresponding highs and lows. An ETF that holds well above a particular low (trough) is stronger than an ETF that tests that low or breaks that low. Similarly, an ETF that breaks above a particular high (peak) is stronger than an ETF that has yet to break above this corresponding high. Let’s look at some examples.

The chart below shows the Nasdaq 100 ETF (QQQ) versus the Russell 2000 ETF (IWM) from May to December. First, notice that QQQ held well above its early June low in August, whereas IWM actually moved below this low. QQQ showed relative chart strength and would be put in a higher group. IWM was back at this low again in early October, while QQQ again formed a higher low to show relative chart strength. And finally, QQQ broke above the prior high before IWM broke above its corresponding high. Clearly QQQ had the stronger chart.

The next chart shows the Semiconductor ETF (SOXX) versus the Software ETF (IGV). Notice how SOXX reached its late July high in mid September as IGV fell well short of this high. SOXX showed more chart strength as an Ascending Triangle took shape, whereas IGV formed a falling wedge. SOXX then forged a higher low in early October when IGV formed a lower low. Relative chart strength continued as SOXX broke out well before IGV. SOXX clearly had a stronger price chart in September and October.

The next chart shows the Home Construction ETF (ITB) versus the Regional Bank ETF (KRE). ITB formed an Ascending Triangle in June-July and held the late July low in early August. KRE was looking strong in July, but broke the green support zone in early August. ITB clearly had the stronger chart in early August as it hit a new high when KRE was breaking down. This relative chart strength continued into October.

Bullish setups and price patterns are not always with the top ranked groups. This is where the nuance comes into play. Most recently, we saw bullish price action in the Metals & Mining SPDR (XME) and a short-term breakout in the Energy SPDR (XLE). XME found support in the 24.5-25 area in late May, August and October. The ETF surged in October and then formed a bull flag. Even though it was lagging and short of a Double Bottom breakout, the bull flag was a short-term bullish continuation pattern. This short-term bull flag was important because a flag breakout would project a bigger Double Bottom breakout.

The lower window shows XLE with a weaker chart overall. XLE moved well below its early June low in August, but found support near the August low in early October. Even with the bounce, falling wedge and wedge breakout, the chances of a Double Bottom breakout were smaller because the wedge breakout occurred well below Double Bottom resistance.

Birds of a flock are grouped together. The next chart shows the 20+ Yr Treasury Bond ETF (TLT) and the Gold SPDR (GLD) with charts that are weaker than most other ETFs the last few months. These two ended up in the lower groups because of this relative chart weakness. Both ended up in the same group because they sport falling wedge patterns.

Despite being in the lower groups, these wedges look like corrections after big moves. Again, here we have another nuanced example. The falling wedge and retracement amounts are typical for corrections after big advances. They are in the lower groups because the charts above are clearly stronger. This does not, however, mean they do not have potential. It all depends on what your requirements.

Summary of Understanding

The ETF Grouping and Ranking report consists of two parts. First, there is the grouping and ranking of 60 core ETFs and an updated ChartBook. Second, there is commentary and annotated charts for select ETFs. This commentary starts with the top ranked groups and works its way down the ranking. At the top of the commentary, I will highlight a few ETFs that stand out for their setups or signals.  

Note that I do not provide specific entry and exit advice. This is because everyone’s approach and situation are different (portfolio size, strategy, goals, current positions, time frame, risk appetite, position size etc…). The ETF Grouping and Ranking Report is comprehensive and includes the setups that I find interesting and timely. Study the charts, read the analysis and find the setups that suit you.

Thanks for tuning in and have a great day!

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

Scroll to Top