Exchange-traded funds (ETFs) can be used as a quick health check or comparison between markets or industries. Conventional retail ETFs have been hammered lower in the past year, composed of mainly brick-and-mortar stores that are losing market share to online retailers. By comparison, the online retail ETF has been moving aggressively higher.

Clearly, investors are buying into online over conventional retail. This isn't a new story. Conventional retail has been declining since 2015. What is interesting is where these ETFs are technically. Has conventional retail reached a major bottom, or is the recent upside push just a blip higher in the long-term downtrend? At the same time, the online retail ETF has been surging, closing in on former highs. (See also: Playing the Decline of Traditional Retailers.)

The SPDR S&P Retail ETF (XRT) saw a major decline in 2015. In 2016, the ETF generally had a ranging year, while 2017 has seen prices decline back to the early 2016 lows. The low in early 2016 was $37.80. On Aug. 21, 2017, the price just barely dropped below that level ($37.72) before quickly shooting up nearly 10%. This indicates that the area around $37.80 to $37.70 still signifies support. Bottom pickers would probably view this as evidence of a bottom, but that may be a bit optimistic at the moment.

The Sept. 13 closing price of $41.38 is still below the most recent swing high (Aug. 8) of $41.73, and the trend is strongly down since late 2016. Before buying this ETF, the price should technically rally above $41.73. The pullback that follows should be weak and slower moving, and it should bottom out well above the August low, showing that sellers are losing steam. This would be in stark contrast to all the drops over the past year, which have been large and very fast. It could take months to see a pattern like that (if it even develops), which would help signal a possible turnaround in the industry. In other words, it is too early to be bullish or excited about conventional retail. More likely, based on the trend, $41.70 to $42.00 is an area to consider short trades with a relatively tight stop-loss. (For more, see: More Pain Ahead for Retail ETFs?)

Technical chart showing the SPDR S&P Retail ETF (XRT) in a downtrend and approaching resistance

The Amplify Online Retail ETF (IBUY​) began trading in mid-2016 and has had an exceptional 2017, up more than 35%. However, recent price action indicates that the ETF could be heading for more of a ranging environment. In July, IBUY posted a swing low of $34.71 and then rallied to a high of $37.88. The August pullback reached a swing low of $34.52, which is lower than the July swing low. That type of price action more often occurs at the start of a range (or downtrend) as opposed to a major rally.

Price levels of $37.88 to $38.00 could be a resistance area at which the price then falls back toward $35. Over the longer term, IBUY's price will likely continue to rise if it can eventually break above the $38 resistance area. Therefore, longer-term traders would be better off waiting to buy down near $35. While the price action indicates a possibility of range, it may not occur. A breakout above $38 would indicate that the next wave of the uptrend is under way and could extend into the $40 region. However, a drop below $34 over the longer term would signal that the uptrend is in trouble. (See also: A Fine Rookie Year for This Retail ETF.)

Technical chart showing the The Amplify Online Retail ETF (IBUY​) in an uptrend and nearing resistance

The Bottom Line

The SPDR S&P Retail ETF, which holds more conventional retail stocks, has bounced, but it is too early to get excited or bullish. More likely, the price is heading into a resistance area and will continue in the direction of the long-term downtrend. Only further strength, along with weak selling pressure on the pullback, would give some technical evidence of a reversal. The Amplify Online Retail ETF is in an uptrend. Recent price action indicates that a more ranging environment could ensue over the next several months, but ultimately, traders and investors may still want to pick this up near support levels. Trends change, so traders should consider the use of a stop-loss to help control losses and risk only a small percentage of account capital on a single trade. (For additional reading, check out: Top ETFs to Trade the Retail Revolution.)

Charts courtesy of StockCharts.com. Disclosure: The author does not have positions in the ETFs mentioned.

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