Weekend Video, Chart Notes and ChartBook

Weekend Video, Chart Notes and ChartBook Update

ETF Chart Notes for Saturday, February 22nd

* These chart notes are also in the ChartBook PDF file (link above)

New 52-week Highs (during the week – unadjusted data)

  • Major Index ETFs: SPY, RSP, MDY, QQQ, MTUM, USMV
  • Sector SPDRs: XLK, XLY, XLC, XLP, XLU, XLRE
  • Equal-Weight Sectors: EWCO, RYF, RYH, RYT, RYU, EWRE
  • Small-cap Sectors: PSCH, PSCU
  • Industry Groups: SKYY, HACK, FINX, FDN, IPAY, IGV,
  • Industry Groups: ITB, XHB, REM, IYR, TAN, IBB, IHF
  • Other: VIG, AGG, LQD, GLD

New 52-week Lows (during the week – unadjusted data)

  • FCG, XES, XOP, AMLP, PSCE

This Week’s Leaders and Laggards:

GDX +8.23%, TAN +8.23%, SLV +4.98%, GLD +4.26%, MJ +4.04%, TLT +2.86%, XRT +1.94%, XLRE +1.28%, IBB +0.93%, IYR +0.84%

REMX -4.73%, SOXX -3.55%, XES -3.3%, BOTZ -2.54%, AMLP -2.42%, XAR -2.08%, XLK -2.05%, IEMG -1.96%, SKYY -1.89%, KRE -1.66%

Bonds and Bond Proxies Lead

Gold, bonds, bond proxies and consumer staples led the market higher this week. Biotechs too. The 10-yr Yield moved below 1.5% and is back near its late summer lows. The 20+ Yr Treasury Bond ETF is up over 9% this year, the Real Estate SPDR and Utilities SPDR are up over 8% and the Home Construction ETF is up over 12%.

Pop and Drop

Stocks did the old pop and drop with a move higher early in the week and a move lower at the end of the week. As such, there were still plenty of 52-week highs during the week. However, some of the leaders and biggest gainers since October were hit the hardest on Thursday and Friday. These include the Semiconductor ETF (-4.38%), the Cloud Computing ETF (-3.32%), the Technology SPDR (-3.26%), the Software ETF (-3.15%) and the Nasdaq 100 ETF (-2.83%).

Another Harami and Prior Corrections

While these declines are not enough to dent the long-term uptrends, these outsized declines in the leaders point to a corrective period ahead. The last corrective period was from August to October. SPY fell around 6% in early August and the traded sideways for three months to form an Ascending Triangle. Corrections can form as flat consolidations, zigzag pullbacks, sharp declines or something in between. A box of chocolates.

Also note that SPY formed a harami for the second time in two months. This is a potentially bearish candlestick pattern that requires confirmation with further weakness (close below 330). We have already seen the signs of excess and SPY is clearly ripe for a correction after a 17% advance since October.

Correction Evidence Continues to Build

On the daily chart, SPY broke short-term support and the Rate-of-Change exceeded -1% for an outsized decline. This shows above average selling pressure and this is negative. ATR(22) is also rising and this shows an increase in volatility, which is also negative. The S&P 500 %Above 20-day EMA (!GT20SPX) formed a bearish divergence from January to February and dipped to 51%. Notice that bearish divergences foreshadowed corrections in May, August and September.

Rate-Sensitive ETFs Remain Strong

The S&P SmallCap 600 SPDR (IJR) is lagging with a lower high from January to February, but the ETF has yet to break short-term support. RSI(10), however, stalled in the 50-60 zone and turned down this week. Should SPY finally move into correction mode, I would not expect small-caps to hold up and a test of the 200-day is possible for IJR.

RSI Forms Bearish Failure Swing in RSI

RSI formed a bearish failure swing for the Technology SPDR (XLK) and Semiconductor ETF (SOXX). Note that a bearish failure swing is independent of a bearish divergence. A failure swing occurs when RSI(14) exceeds 70, falls, bounces and fails to exceed 70 on the bounce. Hence, the failure swing. According to Welles Wilder, creator of RSI, the setup is confirmed with a move below the prior low, which was in early February. I do not know how reliable this setup is, but it does jibe with my assertion that we are moving into a corrective period. I am using RSI(14) in this example because this is the setting used by Wilder.

Industrials, Defense and Materials Consolidate

The Industrials SPDR (XLI) and Aerospace & Defense ETF (XAR) fell back the last six days and RSI(10) moved into the 40-50 zone. Both hit new highs in February and these pullbacks are small corrections within the bigger, and smaller, uptrends. The Materials SPDR (XLB) formed a pennant over the last two weeks.

Bull Flags in XLV and IBB

The Healthcare SPDR (XLV) and Biotech ETF (IBB) held up well last week. XLV closed slightly higher on Friday and IBB gained .70% for the week. XLV has a bull flag working and RSI(10) is near 50. IBB broke out of a flat flag on Wednesday. Keep in mind that flags can be tricky. Make sure to plan your trade BEFORE the entry and trade according to that plan. Consider a move below the flag lows as the initial stop, a profit target for half the position (3 x ATR(22)) and a trailing stop for the remainder (Chandelier Exit).

Regional Banks Fail to Follow Through

The Regional Bank ETF (KRE) and Bank SPDR (KBE) bounced off their 200-day moving averages and after retracing 50-61.8% of the prior advance. This October-December advance triggered a breakout and new high. The pullback into late January could be a correction after this big advance, but neither followed through on the early February surge. Both are also severely lagging since mid December. The bears are on control here in 2020. Watch last week’s highs for breakouts to suggest otherwise. Here is an article showing the positive correlation with the 10-yr yield.

Gold Miners ETF Follows Gold Higher

The Gold Miners ETF (GDX) broke out with a big move the last four days. Breakouts make for good headlines, but the best setups occur when we are watching before the breakout. GDX was featured on February 13th as it set up within the triangle. Trading the pattern within the pattern can give you a jump on the breakout. It featured GLD in the weekend report on February 8th. GLD is trading at new highs after a big move. This means it is the monitor and wait stage.

Enjoy your weekend!

-Arthur Hill, CMT
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