The Tide is Rising: Sector Review Part 1 – Weekly

The market is in a pullback and we learned from the last nights Macro review and preview (link below) that the prognosis is for more of the same in the near term. But what is telling is how this pullback is taking shape from an analysis of the weekly charts of the Sector SPDR’s. The progression is evident as a series of three waves building intensity, like Ocean waves coming ashore reaching a higher mark on the sand signal a turn in the tide. The First Wave signals that the Tide may be turning, the Second Wave confirms it and then the Final Wave shows that high tide has been reached. Lets examine this a bit further.

First Wave

The initial surge lower was led by 5 sectors, Materials Select Sector SPDR,$XLB, Financials Select Sector SPDR,$XLF, Industrials Select Sector SPDR,$XLI, Technology Select Sector SPDR,$XLK and Consumer Discretionary Select Sector SPDR,$XLY. Everyone of these sectors has shown the classic signs of a pullback in the weekly charts. Using the chart of the XLK below to illustrate, notice that as the price has been falling the volume has been building. The Relative Strength Index (RSI) is steadily heading into bearish territory and the Moving Average Convergence Divergence (MACD) indicator is growing more negative after crossing bearishly down. This is indicative of a trend change and shows no signs of stopping. All five charts have these same features.
Technology Select Sector SPDR,$XLK

The lone bright spots show up as potential reversal candles hammers and Doji candles in the XLB, XLF and XLI charts. These give hope that maybe the tide has reached its peak and may start to move in the other direction. But then remember this is just the first wave.

Second Wave

The confirming follow up wave is being led by the Consumer Staples Select Sector SPDR,$XLP, Utilities Select Sector SPDR,$XLU and Health Care Select Sector SPDR,$XLV. These defensive sectors all reversed lower this week after recently being leaders. The tide is turning. Using the chart for the XLV below to illustrate, notice the volume has been rising in recent weeks as the price has also been rising. But this week the volume continued to increase as there was a significant sell off. Additionally the RSI has made a low for the year and the MACD is starting to cross negative.
Health Care Select Sector SPDR,$XLV

This wave may be just beginning given the bearish forward guidance from the RSI and MACD. Common wisdom suggests that the defensive sectors hold up best in a pullback, but what does that mean when they are starting to fall as well. Is the tide going to surge further?

Final Wave

The Energy Select Sector SPDR,$XLE would be the final wave. It rippled two weeks ago but has steadied. As the tide peaks, like a pullback, we often grow accustom to the final waves and they do not move so radically. The chart below shows the ripple last week and the RSI stabilizing. But the MACD is moving lower and nearing a cross and the relative volume the past two weeks is higher, although not materially so. The potential for this wave is still being defined.
Energy Select Sector SPDR,$XLE

How the market plays out over the next few weeks will be determined by the Magnitude of the Second and Final Waves. If the Second Wave accelerates then the tide may reach an extreme, like when the Moon is at Perigee as it is currently, and the pullback will be more dramatic. And if the Final Wave gains power and momentum then what looked like an extreme tide may turn into a tsunami. The Final Wave currently does not show signs of this but markets change. Watch the sectors in the Second and Final Waves to know when the waters will be safe for swimming.

If You’re Not Pretty Stand Next to Ugly People: Sector Review Part 2 – Daily

http://dragonflycap.com/2011/03/19/if-youre-not-pretty-stand-next-to-ugly-people-sector-review-part-2-daily/

Macro Week in Review/Preview March 18, 2011

As always you can see details of individual charts and more on my StockTwits feed and on chartly.)

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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