Sector Review November 27, 2010

• Posted by Greg Harmon
• on November 27th, 2010

Reviewing the SPDR sectors this week revealed that last week’s leaders are still leading the way, the laggards are still lagging and the analysis still holds. So is that the end of the analysis? Of course not. When you need new information you have to change your perspective, so this week will focus on the weekly charts.

The Leaders

The top performers and best looking charts continue to be the Energy Select Sector SPDR, XLE, Industrials Select Sector SPDR, XLI and Consumer Discretionary Select Sector SPDR, XLY. Their charts are below.

Energy Select Sector SPDR, XLE

Industrials Select Sector SPDR, XLI

Consumer Discretionary Select Sector SPDR, XLY

Each of these charts are at or above the April highs, have been near or at the top of the Bollinger bands, have Relative Strength Indexes (RSI) well above 50 which have been rising and Moving Average Convergence Divergence (MACD) indicators that are positive and have been for some time. But what distinguishes them from the rest of the sectors is that there is no question that the price trend is rising. The XLE had a difficult week on the daily charts but when looking at the weekly chart above it printed a healthy consolidating inside candle. On the XLI chart the 7 week consolidating pattern after the rise from the descending triangle is also healthy for the sector. The XLY appears to be just about to start a consolidation pattern of its own after rising from a symmetrical triangle 11 weeks ago. it is worth taking note that the leaders are the charts that are showing signs of rest or consolidation, not continuing a strong trend higher.

Close Behind

There are three other sectors that exhibit many of the same characteristics about price level, RSI and MACD but look just a bit weaker. These are the Materials Select Sector SPDR, XLB, Technology Select Sector SPDR, XLK and Consumer Staples Select Sector SPDR, XLP. I have included the chart for XLK for comparison.

Technology Select Sector SPDR, XLK

This chart illustrates the difference between this group and the first group of leaders above. Notice that XLK has fallen for a few weeks from the highs and is now testing a key support level, in this case the April highs. For XLB it is testing the support from the double top January and April. The trend for these charts is still up but there is more indecision as to whether the uptrend will continue to hold.

The Others

The three remaining sectors have all demonstrated weakness, each in their own special way. All are moving to the middle of the Bollinger bands, and have falling RSI’s.

Financials Select Sector SPDR, XLF

The XLF has been stuck in a rut since August 2009, other than for a brief hiccup in April. The symmetry in the chart suggests that this will continue until year end for the channel to the right of the hiccup to match the channel to the left of it in duration. The last 4 weekly candles closely resemble the first 4 of 5 candles for a Rising Three Methods pattern, which would be completed with a large white candle closing at a new high above 15.68. I note this as something to watch for as the volume has fallen off substantially during the 3 week pullback, the RSI is near 50, and the MACD is flat. This has existed for the last 8 months so it is certainly not a prediction that it will change.

Utilities Select Sector SPDR, XLU

The XLU has been falling for 3 weeks and this week fell through the 20 week Simple Moving Average (SMA). It is nearing the middle of the Bollinger band from the top and the RSI is very close to 50. These two factors are ones to continue to watch as a break lower would cement a down trend and a hold and reverse could start another run higher.

Health Care Select Sector SPDR, XLV

The XLV has also been falling for the last 3 weeks. It also has an RSI approaching 50 and a flattening MACD and is moving to test the center of the Bollinger bands. XLV never regained the double top attained in January and April. It does, however, look to have a strong consolidation channel as potential support at the 200 week SMA just below 30.

Is it possible that these 3 recent dogs of the SPDR sectors are getting ready to hunt? Remember that the leading sectors are showing signs of resting, so were a rotation to occur, the next leg of a bull market could begin. If the dogs rollover at support it might be a drag on the entire market that pulls the the resting leaders lower. Time will tell.

Good luck next week and trade’m well.

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