3 ETF Buy Picks Based on Technical Analysis

The iShares Core S&P Small-Cap ETF (IJR A-) made almost a double bottom technical pattern (January 20, 2016 and February 11, 2016) to painfully climb into a steep upward channel. (See the first chart below.)

It is interesting to note that the IJR ETF is now testing the major resistance trendline (red line of first chart below) that started on June 23, 2015. ​This is a crucial technical zone, and bulls need to break it for a continued outperformance of small-cap stocks.

​​​​​The IJR ETF outperformed tremendously lately compared to the mighty S&P 500 Index (SPY A) on a relative basis. This ratio reached the bottom of this cycle on January 19, 2016, and is now at the resistance trendline that started on June 26, 2015, for small-cap stocks. (See red line of second chart below.)

But the really interesting part is that at a time when we are testing the resistance trendline price wise and on a relative basis on the IJR ETF, it is also near testing the 200 DMA (daily moving average) on that ratio (IJR over SPY), the ultimate battle to win for bulls. (See red line of second chart below.)

As such, the next few trading sessions will be key for the IJR ETF and could become a real trading opportunity needing close follow up. Breakout or no breakout? That is the question!​​

IJR ETF

• Daily Candles​ – right scale
• ​20 DMA (yellow Line)
• ​50 DMA (red Line)
• 200 DMA (green Line)

Daily Ratio – IJR ETF vs. SPY ETF (candles)

• ​​20 DMA (yellow line)
• ​50 DMA (red line)​
• 200 DMA (green line)​

Since we made almost a perfect double bottom technical pattern on the mighty S&P 500 Index to painfully climb into a steep uptrend channel, there is little doubt that the sentiment from market participants improved tremendously.

​​​​​In these greedy times, this has helped the CBOE’s Volatility Index (VIX) enter a steady decline since mid-February to reach near recent lows.

In fact, the VIX Index has entered a falling wedge technical pattern that started in August of 2015 as shown by the chart below.

S&P 500 Index Volatility

• VIX – Daily Candles
• ​20 DMA (daily moving average – yellow line)​
• 50 DMA (daily moving average – red line)
• 200 DMA (daily moving average – green line)

​​​One proxy ETF for the average investor for trading the VIX Index is the iPath S&P 500 VIX Short-Term Futures ETN (VXX B+). This ETF offers investors a way to protect their portfolio through a volatility play as it has a negative correlation to stocks.

​​It is interesting to look at the behavior ​(correlation) ​of the VXX ETF in relation ​to the U.S. Dollar Index ​​(USD-DXY) ​and the price behavior for the mighty ​S&P 500 Index (SPY A).

​​​​As shown by the chart below, this correlation tells us that the risks have not started ​to be fully priced into the foreign exchange market in terms of volatility. As such, investors should expect more volatility in the U.S. Dollar and S&P 500 in the next few trading sessions.

VXX ETF (top panel)​

• CORRELATION​
• VXX ETF over U.S. Dollar Index – DXY Correlation (middle panel)
• ​​S&P 500 Index – SPY ETF (bottom panel – candles)

For the S&P 500 Index (SPY), it started a bullish trend from an almost perfect double bottom and already near the major resistance trendline that started on May 20, 2015. ​(See chart above – bottom panel – top red trendline.)

​​At the time the SPY ETF is near its ultimate resistance trendline, the VXX ETF is already at its support trendline that started on August 10, 2015.

So for investors looking for some protection for their stock portfolios, this could be a nice way to implement it quickly. But do not misunderstand; investors must tread carefully when it comes to investing in VIX-aligned ETFs because they are extremely volatile trading products and the timing of a trade is critical.

​​The Health Care Sector ETF (XLV A) (Health Care Select Sector SPDR Fund) is within a falling wedge technical pattern that needs to be followed carefully at those levels; in fact, we are testing the major resistance trendline from that falling wedge that started in August 6, 2015, the 200 DMA (daily moving average) and also the 50% Fibonacci retracement zone at 70.04 on that ETF. A wall of resistances indeed. (See chart below – thick red trendline – ellipse.)​

But what puzzles me the most is that as we are testing all those resistances levels on the XLY ETF, trading volume is weakening, which is not a good technical sign indeed ​​​​(See chart below – bottom right – blue area.)

Health Care Sector ETF

• Daily Candles​
• ​20 DMA (yellow line)​
• 50 DMA (red line)​​
• 200 DMA (green line)​ ​

On a relative basis ​​​​the Health Care Sector ETF (XLV) started to underperform tremendously compared to the mighty S&P 500 (SPY) on a macro basis since August 6, 2015. That ratio is now within a downtrend channel technical pattern. ​(See chart below – daily channel.)

​​​​But the most interesting technical factor is that ​​the Health Care Sector ETF (XLV), on a relative basis (SPY), is into a dead cat bounce phase only, unable to stay above the 50 DMA and still making a lower highs and lower lows technical pattern. ​​​XLV is definitively weaker than IJR. ​​​​​(See chart below – downtrend channel.)

• RATIO
• ​XLV over SPY (daily candles​)

• ​20 DMA (yellow line)​
• 50 DMA (red line)​​
• 200 DMA (green line)​ ​

As the XLV ETF is having a healthy technical test of multiple resistance trendlines, it is doing so with a lower volume environment;​​ maybe we have to consider that finally we are into an unhealthy technical pattern and must be cautious about XLV’s future performance.

As we can observe with the preceding three ETFs at play, the whole stock market is at a crossroads with volatility expected to increase. The next few trading sessions need a very close follow up indeed. Stay tuned!