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What to Do With These Strong ETFs

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These are some of the strongest ETFs over the last year, up at least 33% each. One is starting to falter, another is forming what is often a topping pattern, and the other remains in a strong uptrend but could be due for a short-term correction.

VanEck Vectors Semiconductor ETF (SMH) has been, and remains, in a strong uptrend. It is up 55% over the last year and trading near its 52-week high of $81.08. The price has been consolidating since May 25, hovering in that $80 to $81 region. This is slightly above the March high of $80.05 and near the top of the rising trend channel which has acted as resistance in the past. Over the last year, when this pattern appears, it is 50/50 on whether the ETF makes another push higher or drops. The good thing is that the trend is strongly up; a pullback would likely drop the price into the $77 region, which would be another short-term buying opportunity. If the price rallies above the recent high, the target is $82.75 to $83. At that point (or close to it) a decline back toward the bottom of the trend channel is expected.

SMH remains in strong uptrend, but price near top of channel

SPDR S&P Bank ETF (KBE) soared in late 2016 but gave back ground in March. This ETF could be faltering, even though it is still up 37% over the last year. The strong rally in late 2016, followed by a much weaker rally in early 2017, signaled a weakening trend. The aggressive March sell off dropped below the January swing low, indicating that a significant correction could be underway. In April and May, the price has rallied slightly but remains well below the March high of $47. If the price declines back below $41.25 the next leg down could be commencing, with a target between $38 and $37. Long-term trendline support is near $31, and the price is near the top of a multi-year trend channel (not shown on chart). Consider waiting for a better price if looking to buy.

KBE in potential large correction

SPDR S&P Biotech ETF (XBI) has been recovering since early 2016 (up 33% over the last year), following a strong sell off in 2015. The uptrend since 2016 has been narrowing in the last several moths, forming a wedge pattern. Wedges often occur before a move in the opposite direction of the wedge. Also, the rise has been choppy and slow compared to the prior sell-off. It has taken more than a year for the ETF recover the losses it suffered in only January and February of 2016. This shows that buying conviction has not come back to this industry. If the price breaks back below $67.25 another decline could develop, potentially into the $54 to $52 region. That said, wedges can last for a long time, which would mean the price continues to edge higher. If this occurs, consider taking profits near the top of the wedge or at trendline resistance, currently near $73.50.

XBI in large wedge pattern

The Bottom Line

The semiconductor ETF is still in a strong uptrend, but the breakout of the consolidation will determine the short-term direction. Consider a purchase near channel support if it pulls back. The bank ETF slowed early in the year and then sold off aggressively. The next likely direction appears to be lower. The biotech ETF has been resilient, rising over the last year. But, with a narrowing range, another drop could develop if the price breaks out of the wedge to the downside.

Disclosure: The author doesn’t have positions in the ETFs mentioned.

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