The Secret to Trading ETFs for Profit

The Secret to Trading ETFs for Profit

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The bull market since 2009 has been characterized by many different phases of sector rotation as some sector ETFs have done much better that the Spyder Trust (SPY) while others have done much worse. In 2010 the Energy Sector Select (XLE) was up 21.8% while the SPY gained over 15%. Both did much better than the Utility Sector Select (XLU) as it was up only 5%.

The next year was much different as the XLU was up 19.6% while the SPY gained just 1.9%. The XLE did just a bit better than SPY as it was up 2.8%. The market leading sectors provide the best trading opportunities as swing trading setups have a higher probability of turning out successfully.

(Side Note: You might also like: The 20 Habits of Wealthy Traders)

So how can traders or investors find the strongest sectors and avoid those that are acting weaker than the overall market?

Over the past twenty years I have applied my unique relative performance (RS) analysis to find the best sectors. This methodology has provided me with the key insight to determine which sectors to buy and also identifying those to avoid or to sell short.

My RS analysis incorporates multi-time frames using both pattern and moving average analysis.

Relative Strength - ViperReport.com

The Health Care Sector Select (XLV) staged a multi-year breakout in 2012 (point 2) as it overcame the resistance at line a. An examination of the long term charts of the S&P Health Care Index also revealed that it had overcome 12 year resistance in 2012. As the performance data on the chart indicates, XLV has been a star performer since 2011.

Below the bar chart of XLV is the RS line in red with a weighted moving average (WMA) in green. The RS line moved back above its WMA at the end of April 2011, point 1, indicating that XLV had again become a market leading sector. This signal corresponded with a monthly close at $32.85 and by the time XLV had overcome the key chart resistance at $35.80 it was already 9% higher.

The RS line has since stayed well above its WMA and the WMA has been rising steadily since early 2012. In spite of the sharp drop in August 2015 the monthly RS line is still above its rising WMA.

XLE ETF - Viper Report

The monthly RS analysis is the key in determining the major trend and also can be very helpful in determining the allocation in your 401K allocation or IRA. The weekly RS analysis however is the key for all traders and is also helpful to many investors. The RS analysis of the Energy Sector Select (XLE) clearly demonstrates why it is dangerous to take a buy and hold approach with any sector ETF.

On March 21, 2014 the weekly RS line for XLE moved above its WMA (line 1) as it closed at $84.54. Over the next fourteen weeks XLE rallied to a high of $97.58. This was a gain of 15.4% or over 1% per week. By the end of June XLE had reached its weekly starc+ band which signaled that it was time to take profits.

On August 1st the RS dropped below its WMA (line 2) . Over the next two weeks as XLE moved higher the RS line kept falling. This was a sign of weakness as the RS line dropped further below its declining WMA. The week of September 12th XLE closed below the prior six week lows. In the last quarter XLE has dropped over 11%.

In January 2015, XLE made a low in January and then traced out a flag or continuation pattern, lines a and b. The weekly RS line made lower lows in March, line d, before it rallied above its WMA in April. The lower lows in the RS line suggested that an important low was not yet in place.

Just two weeks after XLE made its rebound high at $83.11 the RS line dropped back below its WMA. Five weeks later the support for XLE, line b, was broken confirming the RS analysis that the downtrend had resumed. In August the XLE plunged below its weekly starc- band as it is down well over 15% in the past three months.

Though the XLE has been a market lagging sector for most of the past eighteen months, it's time will come.

Relative performance will identify the next turn in the energy sector well ahead of the financial media and it can do the same for any sector ETF.

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0 Responses

  1. […] weekly relative performance (The Secret to Trading ETFs for Profit) broke through resistance from 2014, line b, in April as it was already above its rising WMA. By […]

  2. […] weekly relative performance (RS) is one of my favorite methods for trading ETFs and the RS analysis on XLB appears to have […]

  3. […] Sector Select (XLY) is up 11.6%. The weekly chart shows that since June 12th (line 1) the weekly relative performance and OBV analysis on XLY have been positive as it has gained […]

  4. […] SPDR Dow Industrials (DIA) shows the best monthly and weekly relative performance as it is leading the S&P 500 higher. The bullish divergence in the Dow A/D line has been […]

  5. […] in the $63 area. – The resistance from the triple top, line f, is in the $76 area. – The weekly relative performance has moved above its WMA but is still below the long term resistance at line h. – The weekly OBV […]

  6. […] area is possible over near term upper trading channel and starc+ bands are in $62-$64 area. – The relative performance broke through resistance ( line d) in early December signaled that it was becoming a market leader. […]

  7. […] $122.63. – The 20 week EMA is at $104.60 with more important support in the $100 area. – The weekly relative performance has moved above its WMA and the previous high, consistent with a new market leader. – The weekly […]

  8. […] monthly relative performance line was acting much stronger than prices, line c, at the end of 2015 and has since moved above the […]

  9. […] at $30.62. – The rising 20 week EMA is at $26.68 which represents good support. – The weekly relative performance moved above its WMA on February 12th – The RS line is still holding well above its rising WMA. – […]

  10. […] weekly relative performance now appears to have completed a bottom as it turned up from its WMA and has broken the downtrend, […]

  11. […] late 2015 high at $15. – The quarterly pivot stands at 412.84 with the April low at $12.25 – The relative performance is just below its downtrend, line b, and the declining WMA. – The monthly OBV could move back above […]

  12. […] – A close above the February high at $46.50 would break the downtrend, line a. – The monthly relative performance turned lower from its WMA in April and it needs to move through its downtrend in order to suggest […]

  13. […] selecting stock s or ETF the relative performance analysis plays a key role as it can keep you out of the weak stocks or industry groups and can help you […]

  14. […] two technical studies that I find the most important for selecting stocks or ETFS are the relative performance and on-balance-volume analysis. This does take time as I look at the monthly, weekly and daily […]

  15. […] overcome should signal a move to the 61.8% Fibonacci retracement resistance at $30.75. – The weekly relative performance moved above its WMA two weeks after the January low. – The RS turned higher last week after testing […]

  16. […] close. The Russell 2000 A/D line (not shown) did make a convincing new high last week and the weekly relative performance still looks very […]

  17. […] The weekly relative performance is one of my favorite indicators and it moved above its WMA in early February signaling it was now […]

  18. […] weekly relative performance analysis still favors the SPDR Dow Industrials (DIA) and the iShares Russell 2000 (IWM) over the PowerShares […]

  19. […] quarterly R1 resistance is at $117.21 with major chart resistance, line a, at $120. – The weekly relative performance bottomed in May as the downtrend, line b, was broken. – The RS line has just dropped back to its […]

  20. […] relative performance analysis continues to favor the SPDR Dow Industrials (DIA) and the iShares Russell 2000 (IWM) over […]

  21. […] (QCOM) was up 11.6% last week as it decisively broke through the resistance at line a. The weekly relative performance signaled it was a market leader in May and the daily OBV broke through resistance, line c, almost […]

  22. […] are aware that I use a combination of relative performance and volume analysis to identify stocks and ETFs that I am interested in buying or selling. Some may […]

  23. […] completes the 2016 bottom formation and has initial upside targets in the $68-$70 area. The daily relative performance has confirmed the price action by moving above the resistance at line b. The daily OBV broke […]

  24. […] since June 3rd (line 1). It had been acting weaker than the S&P 500 since early in 2015 as the relative performance has been in a downtrend, line a. The RS dropped below its WMA in early June which was a sign of […]

  25. […] terms of the relative performance analysis the weakest of the four market tracking ETFs is the SPDR Dow Industrials (DIA) while the […]

  26. […] relative performance and OBV both turned positive before prices broke out to the upside. There are a number of stocks […]

  27. […] held above the quarterly pivot since January and the pivot is at $53.95 for the 3rd quarter. The relative performance and OBV have dropped back to support as XLP is testing its 20-week EMA. XLP has outperformed the […]

  28. […] daily relative performance analysis indicates that the IWM and the PowerShares QQQ Trust (QQQ) are both acting stronger than the […]

  29. […] of days with much better volume (>35 million) would help support the bullish case. The daily relative performance has broken its downtrend, line b, and has moved above its prior high completing the bottom […]