The Future Looks Great, but What About Tomorrow? – Sector Review

The market had a great week shaking off the 7% pullback in the S&P 500 and recovering 70% of the move by the close Friday. Looking in the weeds the SPDR Select Sector Funds shows that they all moved higher this week. Everyone has their Bull market horns back on again and who can blame them. Just look at the chart below of the bullish price objectives for each fund using Point and Figure Charts (PnF).

Price Objectives of anywhere from 31% to over 90% higher. Time to just buy everything and go on vacation? Well not so fast. There are some less than positive aspects of the past week as well. First, all of the sectors moved higher on lighter volume. Next the Simple Moving Averages (SMA’s) for each sector are starting to flatten out or already have. Finally 8 of the 9 sectors ended the week with either a evening star, shooting star or doji candlestick, signalling a potential reversal. Maybe the PnF price objectives will be met but there has been some volatility off of the straight line to get where it is today and looks to continue to be a volatile path to go higher. So what to do about volatility in the short term? Focus on the Bollinger bands of course.

The SPDR Sectors can be grouped into 3 pairings using the Bollinger bands indicating the Strong the Weak and those Moving from Weak to Strong.

The Strong

This group contains the Materials Select Sector SPDR,$XLB, Energy Select Sector SPDR,$XLE, Industrials Select Sector SPDR,$XLI and Consumer Staples Select Sector SPDR,$XLP. They are all in the top half of the Bollinger bands, very near the top band and have been there for the entire week. Below is the chart for XLE for illustration. Notice that it has other positive bullish features as well, all of which are shared by the others in the group.

Energy Select Sector SPDR,$XLE

The Relative Strength Index (RSI) is firmly above the mid line and moving higher and the Moving Average Convergence Divergence (MACD) indicator crossed positive a couple of days ago. This group of sectors are the ones to focus on next week.

The Movers

This group contains the Technology Select Sector SPDR,$XLK, Health Care Select Sector SPDR,$XLV and Consumer Discretionary Select Sector SPDR,$XLY. These are Movers because they have just crossed the middle of the Bollinger bands and have bullish leanings. Notice on the chart for XLK below that it is at resistance of the lows that supported it earlier in the month. The XLV and XLY are also at previous resistance levels.
Technology Select Sector SPDR,$XLK

The RSI is just breaking the mid line into bullish territory and has a good slope and the MACD looks to be crossing higher. These sectors do look to have some tail wind to help them through resistance but still need to prove it. Watch for them to confirm.

The Weak

The final group of Weak sectors contains the Financials Select Sector SPDR,$XLF and Utilities Select Sector SPDR,$XLU. The chart of the XLF below shows that these sectors have not been able to break above the mid line of the Bollinger bands. Additionally these sectors have an RSI that is still below the 50 mid line level and looks to be flattening and a MACD that has not yet crossed positive. There is still hope for these two but they are clearly the laggards.
Financials Select Sector SPDR,$XLF

When the XLF and XLU can clear the Bollinger band mid line and head towards the top band it will be easy to declare the pullback over. It would be great if that happened next week but that would be too easy. So in the meantime focus on the Strong sectors with an eye on the Movers in the coming week.

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

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