Defensive Sectors Lead – Sector Review 8/28/11

• Posted by Greg Harmon
• on August 29th, 2011

It was yet another week when if you had the right direction then you had winners, no matter which Sector of the market you chose to place placed your bets. Every one of the Select Sector SPDR funds was up on the week at least 1.8%, with the Utilities Select Sector SPDR, $XLU trailing the pack. And all had up days on Friday except one. The Utilities Select Sector SPDR, $XLU, was marginally lower. With a wind at your back like that you get the feeling that you cannot go wrong. Sometimes the markets line up like that. Often when they are in a strong trend. But this is not one of those times. The updraft from last week in the broad market may continue but there are still many very bearish factors in the charts of even the major market indexes. Even if you are more of an optimist you have to admit that there is no strong trend higher. Except in one sector. The Utilities Select Sector SPDR, $XLU, which has been rising since the August 9th bottom. How can Utilities be both the strongest and the weakest sector? Lets dig a bit deeper.

Utilities Select Sector SPDR, $XLU

The uptrend noted earlier can clearly be seen in the Utilities Select Sector SPDR, $XLU, chart above. It is creating a series of higher lows and higher highs as it marches toward its all time high from July. Notice how quickly it recovered from the big fall in early August. The Relative Strength Index (RSI) is holding over the mid line currently and the Moving Average Convergence Divergence (MACD) indicator is positive but waning slightly. It may have a bit of downside in it but the rising trend looks good until it breaks below the previous lows just under 32.25. If the Hammer from Friday is confirmed Monday then it is poised to lead higher again.

Two other sectors, the Consumer Staples Select Sector SPDR, $XLP, and the Health Care Select Sector SPDR, $XLV are the next strongest charts on the daily timeframe. From the chart below of $XLP, you see the fast recovery from the initial fall to the bottom on August 9 and currently a

Consumer Staples Select Sector SPDR, $XLP

consolidation taking place between 29.50 and 30.40. The RSI has been trending slightly higher and is over the mid line now and the MACD is positive, although flattening currently during this bull flag. A break under 29.50 is bad news but above 30.34 signals more upside out of the consolidation and back to the range over 30.70 which denoted the base for the top area from May through July. The chart for the Health Care Select Sector SPDR, $XLV is similar with a range of 31.00 to 32.40. These are in a nascent up trend.

Just behind those sectors, the Financials Select Sector SPDR, $XLF, is next in line in holding a bear flag in a downtrend. The chart below shows the strong resistance at the top of the flag at 13.35 and the bottom near 12.00. The MACD is diverging bullishly after the recent cross

Financials Select Sector SPDR, $XLF

positive, but the RSI has not bought into a direction yet. A move above 13.35 could jump to the 14.60 level quickly with little resistance along the way, but until then the trend is down.

The 5 remaining sectors, Materials Select Sector SPDR, $XLB, Energy Select Sector SPDR, $XLE, Industrials Select Sector SPDR, $XLI, Technology Select Sector SPDR, $XLK and Consumer Discretionary Select Sector SPDR, $XLY are all in downtrends with no good news last week other than that they did not fall. Using the chart for the $XLE below to describe, they all have a MACD that has crossed up but which is diverging from a RSI that is under the mid line and stalling, and price action that has not reached the previous high from August 15, despite the positive week.

Energy Select Sector SPDR, $XLE

Backing out to weekly charts, they will all look to be in bear flags and the flag may continue. They can all go much higher without breaking that flag. The $XLE for example can rise another 5.6% to 69.50 before it negates the down trend.

So what do the Select Sector SPDR’s tell us about the general market? First the only sectors in uptrends are defensive sectors, $XLU, $XLP and $XLV. The Financials $XLF are close behind but still only the best of the pack in the down trending sectors. Last week did a lot to help the markets but a sector that is no longer falling is not the same as a sector that rising. They could all continue higher off of the momentum from the end of the week, but the fall could just as easily continue at any moment. Stay light and nimble.

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

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