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Market-ETF Report – Cyclical Groups Bounce – More Pennants/Flags Take Shape

Posted By Arthur Hill, CMT On In Archive | No Comments

The next report will be on Wednesday, June 24th

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Note that I will be taking some time off in early July for a family vacation (July 7th to 18th). There will be no written reports or videos during this period. I will, however, update the Broad Breadth Model, Signal Pages and Ranking tables (Saturdays). I will also issue an alert if there is a major change between updates. 

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Report Headlines

  • New Website Navigation Menu
  • Minding the Breakout Gaps
  • MDY Consolidates at Make or Break Level
  • Small-caps Maintain Upswing
  • 10 Equity ETFs in Top 20
  • Tech ETFs with Breakouts and Chandeliers (XLK,XLC,MAGS,AIQ,ARTY,ARKF,SMH,IGV)
  • Flags and Pennants Taking Shape (XLY,XLF,XLI,XLU,KIE,KBWB,IHI)
  • IYZ and BLOK form Cup-with-handle Patterns
  • Can Home Builders/Construction ETFs Bounce?

Cyclical ETFs Lead on Monday

Stocks shrugged off the events in the Middle East and rallied on Monday. Small-caps, Consumer Discretionary, Home Construction, Banks, Infrastructure and Transports led the way higher. These are largely cyclical groups and relative strength suggest that the advance may be broadening. It is still early days, but I am seeing lots of pennants forming from mid May to June. Breakouts would signal a continuation of the April-May advance and suggest that the advance is broadening. Note that we saw pennant breakouts in several tech related ETFs in early June and we are following these with Chandelier Exits.

The table below shows the 20 ETFs with the biggest gains on Monday. It is sorted by the 1-day percentage change (% CHG). The blue shading highlights nine cyclical ETFs that outperformed the broader market on Monday.

Technical Event Timeline

SPY and QQQ Extend after mid May Breakouts

SPY turned bullish with the gap-breakout on May 12th. This move pushed SPY above the 200-day SMA and the long-term trend is up. I am marking long-term support at 560 (blue line). A close below 560 would erase the gap-breakout, break the 200-day SMA and reverse the long-term uptrend.

Short-term, SPY became overbought with a surge from early April to mid June and worked off this condition with a short pullback. A small falling wedge or pennant formed and a breakout would signal a continuation higher. This would argue for a move to new highs.  

I am marking the first support zone in the 570-580 area. A deeper dip into this area would create a short-term oversold condition and an opportunity (blue shading). A %B dip to the zero area and/or RSI dip to the 30 area would confirm an oversold condition.

The QQQ chart shows similar characteristics, but QQQ is stronger than SPY because it is closer to a new high and further above the breakout zone (490-500). Long-term support is set at 480 for QQQ (blue line). A close below this level would fill the gap and break the 200-day SMA.

Short-term, QQQ surged from early April to mid June and then formed a falling flag the last five days. This is a short-term bullish continuation pattern, known as a high and tight flag. A breakout would signal a continuation higher and open the door to new highs. Should QQQ pull back, I would watch the 500-510 area for potential support and an oversold condition (blue shading).

MDY Consolidates at Make or Break Level

The S&P MidCap 400 SPDR (MDY) is trading at resistance (blue shading) with a potentially bullish pennant taking shape. Long-term, MDY is in a downtrend since the breakdown in early March. The ETF returned to broken support with the surge from early April to mid May. I am marking a Bearish Setup Zone using broken support turned resistance, the 200-day SMA and the 61.8% retracement (blue shading). This is the area where one would expect a counter-trend bounce to reverse and the long-term downtrend to continue. Thus, MDY is at a make or break point. A close below 540 would reverse the short-term uptrend and signal a continuation of the long-term downtrend.

Short-term, MDY formed a pennant since mid May. These are short-term continuation patterns that represent a rest after a big move. They take their directional bias from the previous move, which was up. A breakout at 363 would signal a continuation higher and argue for a bigger breakout at 570. I will add a Chandelier Exit should MDY break out and exceed 570. A close below 540 would negate this setup.

Small-caps Maintain Upswing

Even though the S&P SmallCap 600 SPDR (IJR) remains well below its falling 200-day SMA, the short-term trend is up (early April to June). IJR broke the December trendline and late March high in May-June. A small pennant formed into early June and IJR broke out with a surge to 110. After a dip to 106 last week, the ETF surged 1.34% on Monday, which means the breakouts are holding. The bulls get the benefit of the doubt as long as support at 104 holds.

10 Equity ETFs in Top 20

The table below comes from the ETF Rotation Strategy. See this page for more details [5] and the complete ranking table. I am only showing the Trend Trio, ETF Momentum and 5-day Change columns. First, I just want to make sure the ETF is in an uptrend (Trend Trio). I then sorted by ETF Momentum to show the leaders. 10 of the top 20 are equity ETFs. Among these, there is also a strong showing from tech-related ETFs (ARKF, FDN, CIBR, IGV, ARKK, AIQ). The other 10 ETFs are related to commodities, crypto and bonds.

Tech-Related ETFs with Breakouts and Chandeliers

Based on the price chart, the Technology SPDR (XLK) is a leading sector because it recorded a 52-week high this month (XLI as well). As with SPY and QQQ, XLK broke out with a gap-surge on May 12th. This move negated the breakdown in early March and propelled the ETF above the 200-day SMA, which turned up in May. Thus, the long-term trend is up with support marked at 215.

Short-term, XLK surged into mid May, formed a pennant into early June and broke out with a surge above 235 on June 3rd. XLK tagged a new high last week and remains strong. The red line shows the Chandelier Exit (22,2), which is 2 ATR(22) values below the 22-day high. This exit rises as long as XLK rises. With the exit currently at 235.04, an exit would result in a breakeven trade. As previously noted, short-term traders can consider taking some money off the table with profit targets. For example, close half after a 3-5% gain and set a trailing stop for the remainder.

Waiting, Watching and Actual Trading

Trading involves a lot of waiting and monitoring. In fact, most of our time and effort are spent waiting for setups to emerge and monitoring current traders. Actual buying and selling accounts for a relatively small portion of time. Keep this in mind. We do not be constantly busy buying and selling. Waiting and monitoring are important to the process.

Seven Tech ETFs with Pennants and Tight Stops

The next charts represent ETFs in the waiting and monitoring phase. They surged, formed small consolidations (setups) and broke out. These ETFs are currently on the move and in the trend-monitoring phase. I am showing updated charts with the Chandelier Exit (22,2).

Flags and Pennants Taking Shape

There are several non-tech ETFs forming short-term flags or pennants. Breakouts would be bullish and suggest that the market advance is broadening. The next chart shows the Consumer Discretionary SPDR (XLY) hitting a moment of truth as it consolidates between the rising 200-day SMA and broken support (blue shading). Short-term, the ETF surged from early April to mid May and then consolidated with a falling flag. A breakout at 215 would signal a continuation higher and increase the odds for a bigger breakout at 220.

The next chart shows the Finance SPDR (XLF) surging from early April to mid May and forming a pennant into June. A breakout at 51 would be bullish.

The next chart shows the Industrials SPDR (XLI) with a pennant in late May and a breakout in early June. This breakout is largely holding with a re-evaluation level set at 140. Note that a break below 140 would not affect the long-term uptrend. A break would argue for a pullback or corrective period that would lead to the next short-term setup.

The next chart shows the Utilities SPDR (XLU) wit a channel breakout in early May and a pennant forming into June. A breakout at 83 would signal a continuation higher. %B became moderately oversold with a dip into the 0-.25 area last week.

The next chart shows the Insurance ETF (KIE) within a falling channel this year. I view this as a correction after the 31.8% surge and a breakout at 61 would signal a continuation higher. Short-term, KIE surged from early April to mid May, formed a pennant and broke out with a surge the last three days. This short-term breakout signals a continuation of the April-May advance and increases the chances for a bigger breakout. A close below 57 would negate the pennant.

The next chart shows the KBW Bank ETF (KBWB) breaking out with a gap-surge on May 12th and then consolidating into June with a pennant. KBWB surged the last three days and broke the pennant line. This breakout signals a continuation of the April-May surge and targets a move to new highs.

The next chart shows the Medical Devices ETF (IHI) surging from early April to mid May and forming a small falling wedge into June. IHI is testing the 200-day SMA with this pullback and %B became oversold last week. Thus, we have an oversold setup within a long-term uptrend. A close above 61 would provide the first clue of an upturn within the wedge. A wedge breakout at 62.5 would signal a continuation of the April-May advance and open the door to new highs.

IYZ and BLOK form Cup-with-handle Patterns

The cup-with-handle is a bullish continuation pattern that was popularized by William O’Niel of IBD. It is primarily associated with growth stocks, but can apply to any price chart. The cup represents a basing process, the handle is a small consolidation on the right side and a break above rim resistance confirms the pattern. Ideally, the cup should form as a rounding base, not a V reversal. The April low formed as a V reversal. Even though this does not invalidate the pattern, it makes it less than ideal.

The chart above shows the Telecom ETF (IYZ) with a V reversal in April, a cup extending from March to May and a handle forming from mid May to mid June. The handle looks like a pennant, which is a bullish continuation pattern. A break above rim resistance would forge a new high and signal a continuation higher.

The next chart shows the Transformational Data Sharing ETF (BLOK) with a cup-with-handle from December to June. BLOK also formed a pennant the last few weeks and a breakout would signal a continuation of the surge from early April to mid May. Note that BLOK is very volatile with an annualized 21-day Standard Deviation of 45%.

Can Home Builders/Construction ETFs Bounce?

The Home Construction ETF (ITB) and Homebuilders ETF (XHB)  are two of the weakest ETFs in our focus list, which has 74 ETFs. Both are below their 200-day SMAs, the hit new lows in April and their price-relatives hit new lows in June. There is not much to like here, unless you are a contrarian or bottom picker.

The first chart shows XHB, which is less weak than ITB. XHB formed a falling channel from January to April and broke the upper line with a surge above 100. The ETF fell back from mid May to June with a triangle that retraced 50-61.8% of the prior advance. This makes it a possible short-term bullish continuation pattern. ITB surged on Monday and is on the verge a breakout that would argue for a move to the falling 200-day SMA. A close below the late June low (92.5) would call for a re-evaluation.

The next chart shows ITB with similar characteristics.

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