ETFs, Technical Analysis: A Better Match Than Ever

Advisors and self-directed investors can chart their course.

My late father taught me to chart stocks when I was 16. 

That was 44 years ago. And with modern markets have come more automated and complex ways to use that art and science that do-it-yourself investor dad of mine taught me to do by hand, using paper and pencil. It was 1980, and we lived in New Jersey. Big hair days, for sure. 

The current debate over whether we are headed for recession, whether the Fed has pulled off a rare feat by avoiding one, or if we are already in one is raging. Because all those possible answers have backers among the professional financial community. 

But there is a tool we didn’t have four decades ago that allows any investor to draw their own conclusions. Yes, about the recession question. But also, about a much more important one: What can investors do to profit from whatever comes our way, and along the way, not take on huge risk of “being wrong?”

That tool is ETFs. Because while many investors still think of them to get the whole S&P 500 index in one trade, as a “buy and hold the market” approach, there is much more to ETFs. I built and sold an advisory practice with that as one of the key attraction points.

ETFs’ greatest value is in segmenting the markets for us and allowing us to easily apply charting techniques to those many micro-market components. That’s why I so enjoy writing about ETFs in my post-advisory life.

And that is why ETFs and charting go together so well.

Technical Analysis and ETFs

Charting is not the type of confusing technical analysis that pervades Wall Street and sells confusing investment software and trading services, jacked up with Greek symbols and fancy math.

I’m just talking about simply observing patterns, levels of interest to the market, and getting in sync with what today’s markets are moved by, more than at any time in the past: technical signals and flows of huge dollars into and out of ETFs. 

With that in mind, here’s a timely guide to reading the market’s mind. We might even find a recession there somewhere, just by examining some ETF charts. 

This is just one article about applying what I call “meat and potatoes” technical analysis to ETFs. So, I’ll stick to one chart, the one recession and bond-watchers follow most closely, the yield on the 10-year US Treasury bond. This chart shows the yield times 10, so that the 5% peak rate reached 11 months ago appears as 50.00 on the chart.

Key comments on this picture: 

• That pair of heavy black lines shows the tight range rates floated in for a while, before breaking lower in August. 

• The bottom section of the chart shows a momentum indicator. Two things I look for are now in play. First, the trend in rates “rolled over” and now it is down. Second, it crossed below the zero line, which means it threatens to pick up steam.

  

• The 10-year yield as of Monday morning was around 3.71%. But the markets have a memory, so I’ve drawn in a pair of red “support” lines to mark possible destinations for rates. 
• The first level down is modest, to around 3.20%-3.25%. That would pad recent investor gains in ETFs like the $63 billion iShares 20+ Year Treasury Bond ETF (TLT) and the $33 billion iShares 7-10 Year Treasury Bond ETF (IEF), both of which are used by hedge funds and other tactical investors to try to profit from lower rates in one simple trade–all made possible by the existence of ETFs.
• Finally, there’s that other red line on the top of the chart, the lowest of the three I drew. That one is where the rising rates thing started nearly three years ago, as the Fed raised overnight rates 11 times, which had a related impact on the 10-year bond rate. That lower red line is at 1.40%. Uh oh!
• While a return to much lower rates will help bond ETF investors and those seeking better borrowing costs, it will likely mean the economy has entered a deep recession. The 10-year chart tells me that is now on the table, though certainly not a done deal. 

This is simply a message to ETF investors that technical analysis is now infused into what makes our wealth shift its value, much more than ever before. So, it helps to understand it better.

ETFs offer a convenient education tool, since there are funds that track so many corners of the global bond and stock markets.

ETFs and charting are one of my favorite pairings for investing in modern markets.