Analysis of Exchange Traded Funds

Since mid-2008 the United States Natural Gas Fund ETF (UNG) has been trending down. There are now the beginning signs that it may have reached a bottom.

Recently UNG found support at the $5.00 price area having hit a low of $4.98 on January 19, 2012. A second decline found support a little higher at $5.02. Together, we now have the makings of a double bottom reversal pattern.

Supporting evidence includes:

- Downtrend has accelerated lower at three angles of descent, before hitting the recent bottom, thereby creating a fan effect

- Significantly higher volume recently, which can best be seen on the weekly chart

- Volume spikes further into a trend can signal exhaustion

- Bullish divergence with weekly RSI

Resistance of the current short-term trend is defined by the trend line and 21 exponential moving average (ema) (now at $5.56) as seen on the daily chart. The next higher trend line and 55ema mark resistance of the medium-term trend.

A breakout of the double bottom price pattern occurs above $5.98, which gives a minimum target of $6.98. At that point UNG would be above the 55ema and at or close to resistance of the long-term trend line starting from the 2008 high of $127.78. (www.etf-portfolios.com)

As posted a couple months ago iShares MSCI Japan Index Fund ETF (EWJ) had broken down from a large head and shoulders top reversal formation, as seen in the weekly chart.

Since, it has failed to follow-through to the downside and is now showing signs of strengthening, at least in the short-term. A double bottom reversal has formed on the daily chart. Bullish confirmation is needed and signaled on a close above the neckline at $9.44. Last week’s close was $9.45. If EWJ can rise higher from here or stay above the $9.44 price area, then further upside is likely. Around $10.00 is the next area to watch for resistance.

The long-term weekly bearish head and shoulders top remains valid however unless EWJ closes above the downtrend line. This line is coming down from the top of the head and connecting the right shoulder. (www.etf-portfolios.com)

iShares MSCI Brazil Index Fund ETF (EWZ) broke out of a well formed head and shoulders bottom reversal pattern last week along with a pickup in volume. It has now closed above the 200 daily exponential moving average (ema) for the first time since July 2011. Also supporting the bullish breakout, the 21ema has crossed back above the 55ema for the first time since May 2011.

Last week the 50% Fibonacci retracement of the larger downtrend from April 2011 high was hit. A pullback towards the neckline support can be watched for a new entry.

The measuring objective for this reversal pattern is approximately $77.77. If the target is reached EWZ would be very close to the highs hit in the period from late-2010 to early-2011. The high during that period was $81.76.

Lower targets can include $68.40, the 61.8% Fib. retracement level, followed by $73.60, the 78.6% Fib. level. (www.etf-portfolios.com)

Last week the iShares MSCI Japan Index Fund ETF (EWJ) fell through the neckline of a multi-year Head & Shoulders Top Reversal pattern. The breakdown was triggered at approximately $9.15, with EWJ closing at $8.84, the low for the week.

Volume did not confirm the bearish signal as it was at the low end of the range. However, given the shortened trading week, this is to be expected. Given the long-term nature of the pattern, this is a particularly bearish signal.

The measuring objective/target based on the price distance from the top of the head down to the neckline is approximately $6.67. Calculating the same based on the percentage change provides a slightly higher target of $6.94.

At some point EWJ will find higher support and retrace back towards resistance of the neckline. A new entry level can be watched at that point to take advantage of the follow-through to the downside.

The next support area may be around $8.67, the 61.8% Fibonacci retracement of the full rally off the March 2009 low. Below there is possible support around $7.87, the 78.6% Fibonacci retracement level. (www.etf-portfolios.com)

Since the SPDRs S&P 500 Trust Series ETF (SPY) found support at $110.27 four weeks ago – the 38.2% Fibonacci level of the uptrend measured from the March 2009 low – its been tracing out a Bearish Flag formation. The objective for the Head & Shoulders top reversal pattern at approximately $114.89 was surpassed during the decline. 

Note on the following weekly chart that resistance last week was found at the confluence of the following: near the 38.2% level of the July 2010 uptrend, the 50% retracement of the July 2011 downtrend, the top of the channel line identifying the Flag, and close to the 55ema on the weekly chart. Volume has been declining during the bounce/formation of the Flag. 

The Flag could continue to develop over the coming weeks, bouncing off support of the uptrend line and rallying again up towards the top trend line. It’s possible it could get up towards the neckline of the Head & Shoulders top, which would put it very close to the 61.8% Fibonacci retracement of the early-July downtrend, the 200ema on the daily chart, and the top channel line. 

Regardless, a bearish breakout below the lower trend line would be a little more reliable if this Flag takes some more time to develop. If the downward momentum continues to carry the SPY lower in the short term it could run out of steam by the time the lower trend line is reached. A bearish breakout of the Flag has a better chance of following-through if the decline begins close to the lower line after a period of minor consolidation. Conservatively, the target for the Flag is approximately $98.78. (www.etf-portfolios.com)

There are a number of bullish technical signs showing up in the charts of the iShares Barclays 20+ Treasury Bond Fund (TLT) ETF that indicate further upside is likely.

First, TLT broke out of a Head & Shoulders Bottom Reversal pattern several weeks ago which was confirmed this week as a clear move above the neckline occurred. TLT is now attempting to follow-through to the upside after reaching the 38.2% Fibonacci retracement level of the downtrend measured from the late August 2010 high. Another close above the neckline for confirmation would be welcomed.

In the bigger picture as seen on the weekly chart, the long term downtrend line was broken a month ago and the 21 period exponential moving average (ema) is trending up. Also on the weekly chart, TLT has closed above support of the 50ema, 100ema, and 200ema. These moving averages had converged recently and the 100ema is now starting to diverge, confirming the likely continuation of the uptrend.

In the near term, momentum slowed a bit last week which could indicate TLT is close to a further pullback or consolidation. The close last week was in the lower half of the weekly candle and not too far from the opening of the week and volume has been declining. Stochastics is also confirming short term bearish momentum.

If a pullback does occur, watch for a setup for a new entry to take advantage of the medium term bullish behavior at a lower price.

As long as TLT stays above support of the downtrend line then the chance of further upside remains. However, more bullish behavior would be indicated if TLT stays above support of the 21ema on the weekly chart. A pullback to the 21ema is certainly possible without changing the medium-term bullish picture.

Alternatively, there may not be much of a pullback from here as there are a couple confirming bullish signs on the daily chart. Last week the 200ema and 21ema was tested as support and the 21ema is now crossing up through the 200ema.

The target for the Head & Shoulders Bottom is approximately $101.68. This matches the 61.8% Fibonacci retracement level of $101.24. Although this target may not be reached, it does add to the bullish evidence that TLT could see further upside over the coming months. (www.etf-portfolios.com)

The SPDRs Select Sector Financial ETF (XLF) has broken down out of a bearish descending triangle formation closing last week at $15.77. XLF closed right at potential support of the 200 day exponential moving average (ema), 50% retracement of the uptrend measured from the late November 2010 low (light blue), and the 38.2% Fibonacci retracement level of the uptrend measured from the late August 2010 low (purple).

Bearish confirmation will come on a close below these indicators, with $15.71 being the low price (38.2% Fib). A pullback from here could create a new short entry setup.

Another way to play the weakening of financials is with the ProShares Ultra Financials (UYG), ProShares UltraShort Financials (SKF), and Drexion Financial Bear 3x Shares (FAZ). All have 50 day average volume of greater than 1.5 million shares.

The chart on the ProShares Ultra Financials (UYG) shows a bearish breakout of a symmetrical triangle formation. UYG broke out on Thursday with follow-through to the downside on Friday.

There is a strong potential support zone close by where UYG could bounce to test resistance of the triangle (previous support) before continuing lower. The change in trend along with the triangle breakout should provide enough downside force for UYG to trend below this support zone.

This support zone is identified by the bottom of the triangle ($64.31), previous resistance from November 5, 2010 ($64.43), confluence of two Fibonacci retracement measurements, and the 200ema ($65.08).

As an alternative to shorting the two ETFs discussed above, one could look to go long the reverse ETFs, SKF or FAZ.

The chart patterns for each are similar showing very clear bottom symmetrical triangle formations. Each is now trading above their 50ema’s on the daily charts. (www.etf-portfolios.com)

UUP, the PowerShares DB US Dollar Bull ETF, gaps up off support in the area of confluence of several Fibonacci measurements, with a surge in volume. This may be an indication that the recent low of $20.84 will hold, at least for now.

Fibonacci confluence occurs in the range of $20.92 to $21.09, with $20.92 to $20.99 being the more important area given the close proximity of the two measurements.

127.2% extension of the uptrend measured from the 11/09 low = $20.99

161.8% extension of the uptrend measured from the 11/10 low = $20.92

61.8% projection of 6/8/10 swing high to 12/1/10 swing high (not shown on chart) = $21.09

Over the past several months UUP had been forming a bullish wedge formation with a failure signal on a break down out of the wedge on 4/21/11. UUP closed yesterday back in the territory of the wedge. However, this does not mean that the bullish wedge formation is again valid.

Given the 1.48% rally yesterday on high volume, after hitting a support area confirmed by several measurements, further upside is likely. UUP can to be watched for an entry setup on a pullback towards support ($20.98 closes gap) of the confluence area.

On the upside, at a minimum there’s a good likelihood that the gap from 4/20/11 will be filled at $21.50. This is also near the area of confluence of two Fibonacci downtrend retracement measurements, as can be seen on the third chart. (www.etf-portfolios.com)

What’s interesting about the current chart pattern in the iShares MSCI Hong Kong Index Fund ETF (EWH) is that a tight consolidation triangle pattern is forming right up against resistance of the downtrend line that identifies the parameter of a five month corrective base. This base is a long term Bullish Flag formation with the triangle part of a Bullish Pennant pattern – a pattern within a pattern. 

A move above the downtrend line ($19.67) will signal a breakout of both the long term Bullish Flag and short term Bullish Pennant, thereby strengthening the setup. 

The Pennant allows for tighter risk management as a move below the trend line support (see orange line) at the bottom of the pattern, ($19.15) will identify failure in the short term (at a maximum). Tighter risk management can also be used. Other supportive bullish signs include: 

Long Term (weekly chart):

  -during recent five month correction support of the 50ema held

  -12ema stayed above the 21ema during correction

  -Bullish Pennant is forming just above support of the 21ema and right at support of the 12ema

  -volume has been declining during correction

  -most of the Flag occurred above the 61.8% retracement support level of the larger downtrend

  -Flag is only the second base formation after coming off the March 2009 low

Short term (daily charts):

  -horizontal support of the Pennant is identified numerous times (horizontal grey line – circles)

  -successful test of both the 50ema and 21ema during recent pullback

  -failed to stay below the 200ema

(www.etf-portfolios.com)

HOLDRS BioTech ETF (BBH) formed a very clear bearish Shooting Star Candlestick pattern last Thursday indicating a further correction is likely in the short term. 

The Shooting Star in the BBH daily chart is particularly ominous as the range of the day was relatively large; the largest in more than several months, and it comes after a second sequential runaway gap. 

A Shooting Star formation reflects a high level of enthusiasm by buyers at the start of the day which completely flips to bearish by the end of the day as sellers aggressively counter the early buying strength. 

Runaway gaps frequently show up near trend exhaustion. Gaps are common with ETFs but if you look at the two recent gaps in BBH relative to previous price action you can see how they stand out. 

The combination of the shooting star and runaway gaps puts BBH in a high probability category for a further correction. You can also see that BBH found resistance on Thursday at the top trend channel line. It’s also interesting to note the significant decrease in volume over time as seen on the weekly chart, and during the recent rally, on the daily chart. 

When looking at the bigger picture the outlook for BBH is bullish. Biotech is one of the leading sectors in the market. 

Two weeks ago BBH moved to new highs after breaking out of a five and half year (5.5) basing pattern. A retracement of BBH at this point could find support at around $107.59, the top of the base (previously resistance) or around $103.78, previous resistance of a smaller base inside the larger base.  (www.etf-portfolios.com)