Aiming for the Bull’s Eye: Sector Review January 15, 2011

• Posted by Greg Harmon
• on January 15th, 2011

The daily charts for the Select Sector SPDR reveals that every sector ended the week higher than where it started. That says something about the breadth of the move higher last week.

So should you just throw darts at stocks and come up a winner? Of, course not the dart board does have a Bull’s Eye. Why just get the dart on the board when the Bull’s Eye is worth more than the blue circle, which is worth more than the red circle.  Pin pointing the right sector can do the same for distinguishing your returns.

Let’s look at what sectors spent the week in the Bull’s Eye, in the Blue Circle and in the Red Circle.

Bull’s Eye

This week the market had pretty good accuracy and 5 sectors fell within the Bull’s Eye area.  To distinguish them slightly we will split the Bull’s Eye into two parts the Black Center and the Red Surround. Financials Select Sector SPDR, XLF, and Technology Select Sector SPDR, XLK found the Black Center. These sectors trended higher all week and ended the week with strong candles higher. Below is the chart for XLK.
Technology Select Sector SPDR, XLK
Note the long trend higher continued this week, hugging the top Bollinger band with the Simple Moving Averages (SMA’s), Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) indicator all trending up. Energy Select Sector SPDR, XLE, Industrials Select Sector SPDR, XLI and Utilities Select Sector SPDR, XLU all came close but ended up in that Red Surrounding ring. These sectors consolidated mid week before printing Bullish Engulfing candles Friday with bullish MACD crosses higher in addition. They may be ready to move into the Black Center next week.

Blue Circle

Consumer Staples Select Sector SPDR, XLP and Consumer Discretionary Select Sector SPDR, XLY struck the board in the Blue Circle just outside of the Bull’s Eye. These sectors are in up trends but have been consolidating for a while. The chart for XLY is below.
Consumer Discretionary Select Sector SPDR, XLY

These sectors show some positive signs. Note on the chart that within the MACD, the shorter Exponential Moving Average (EMA) has started to move higher towards a bullish cross over. This can also be seen in the MACD indicator becoming less negative. The RSI is starting to point up as well. The squeezing Bollinger bands suggest a move to come very soon. These sectors could very well move into the Bull’s Eye next week.

Red Circle

Materials Select Sector SPDR, XLB and Health Care Select Sector SPDR, XLV hit the board but only in the wide Blue Circle. The chart below of XLV shows the RSI has been hovering near the technically overbought level and the price has bounced off of the top of the Bollinger bands. The MACD is very slightly positive but may be shrinking to zero, highlighting the consolidation. These sectors may continue to consolidate and do not look to be headed anywhere near the Bull’s Eye next week.
Health Care Select Sector SPDR, XLV

Sector Trade Idea

There are clear trade ideas that can be had be pairing the Bull’s Eye sectors long against the Red Circle sectors short. The best of these looks to be long the XLK against short the XLV. Below is a daily ratio chart of the pair.
XLK vs. XLV

This chart shows the ratio approaching the resistance level for the third time since November, off of a higher low each time. It also has a rising RSI that is much lower than the previous peak levels and a MACD that is crossing higher as opposed to the downward crosses on the first two approaches. A break above the resistance line could move to a ratio of 0.85 or higher. A ratio of 0.80 could be used as stop.

Aim for the Bull’s Eye and trade’m well.

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

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