Sector Review: One Bright Shining Star

• Posted by Greg Harmon
• on January 30th, 2011

Reviewing the SPDR Sectors this week I noticed many similarities in the charts, many of them not good. Of course they all had big down days on Friday but had a very positive week before that. All have declining Relative Strength Indexes (RSI). Many have a worsening Moving Average Convergence Divergence (MACD) indicator and most are now below their 20 day Simple Moving Average (SMA). But there were also some distinguishing factors. Let’s look at the charts.

There are 3 sectors that just look like a mess. These are Consumer Staples Select Sector SPDR, XLP, Health Care Select Sector SPDR, XLV and Consumer Discretionary Select Sector SPDR, XLY, with XLY the ugliest. In addition to the factors above these have an RSI well under 50 and in addition to being under the 20 day SMA they are also under the 50 day SMA. The chart for XLY is below. Notice from the chart that about the only positive thing XLY has going for it is that it has fallen out of the Bollinger bands, so the bleeding might stop soon.

Consumer Discretionary Select Sector SPDR, XLY

The next group is not really that much better and contains Materials Select Sector SPDR, XLB, Financials Select Sector SPDR, XLF, Technology Select Sector SPDR, XLK and Utilities Select Sector SPDR, XLU. The major distinction in this group is that none of their RSI has yet crossed below 50. XLU is the only one that has not yet had a bearish MACD cross, but a down day Monday could have it join that club too.

That leaves two sectors Energy Select Sector SPDR, XLE and Industrials Select Sector SPDR, XLI that look like the best of the lot. Below is the chart for XLI.

Industrials Select Sector SPDR, XLI

What makes the XLI standout is that it has not yet crossed its 20 day SMA. Additionally there is support from the doji candle from January 20 of the prior week nearby. This is not to say that there is not more downside in XLI but rather that it has held up relatively well, with the rising trend still solidly in tact.

Looking at the chart of XLE below, someone clearly forgot to tell the XLE that Friday was a a horrible day in the market. Sure it had a down day but it looks like a minor fluctuation in the trend rather than a selloff. Notice the small size of the real body of the candle from Friday. The RSI is also still very close the the 70 level. this sector has been the leader in the rally from September and still looks strong.

Energy Select Sector SPDR, XLE

As you prepare for what looks to be a very interesting Monday, keep in mind the relative strength of the XLI and especially the XLE, in creating your plan and trade’m well.

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