Solid Fuel Boosters Away, We Are Now Into Space

A rocket launch starts with high powered energy from the solid fuel booster ignition. Once it has momentum and is moving higher that fuel becomes less important as the friction of the atmosphere gives way to empty space. At that point the Astronauts can unbuckle and get about their normal business knowing that the infrastructure has held and the emergency back up power is in place. The market rally may be going through a similar transition. Whether you look at the move higher from important Fibonacci levels or exceeding a 100% return from the bottom as important, as the indexes pierce this containment it becomes easier to move higher. If this continues it is good news for the market as noted in last weeks article about the four themes in the market (link below). So what is going on in our spaceship?

Transition to Space

Like a rocket breaking into space the main fuel supply gets cut back as the forces holding it back, the friction, diminish. Energy Select Sector SPDR, XLE has been the leader of this move, acting as the solid fuel booster to the rocket. But this past week it has stalled.

Energy Select Sector SPDR, XLE

Financials Select Sector SPDR, XLF

XLE has been moving sideways for two weeks now. The Moving Average Convergence Divergence (MACD) indicator is falling and about to cross bearishly lower as the Relative Strength Index (RSI) falls from being technically overbought. It is also moving lower within the Bollinger bands towards the middle at the 20 day Simple Moving Average (SMA). It could correct sideways to support at the 20 day SMA as it has before but has support below that at the rising 50 day SMA. As this is happening the drag or friction on the market from Financials Select Sector SPDR, XLF, has been diminishing like the thinning of the atmosphere. This sector has become a leader and is making new highs. The RSI is trending higher and the MACD has crossed up and is increasing as it continues to move higher off of the 20 day SMA.

Astronaut Work Begins

Now the Astronauts can unbuckle and do their spacewalks, experiments and re-energize with some space food and Tang. This normal activity can be seen in the continued strength of the Consumer Staples Select Sector SPDR, XLP and Consumer Discretionary Select Sector SPDR, XLY. XLY made a new high on Monday and never looked back, like the Astronauts getting busy and forgetting about the new environment. The RSI is rising and just reaching the technically overbought level but is not near extreme, with a MACD that is rising fast. The Bollinger band expansion is also helping to fuel this burst of energy. The chart is below.

Consumer Discretionary Select Sector SPDR, XLY

The XLP is not quite as interesting relatively, like the Astronauts preference for work over eating from a tube, but still shows strength. It has a rising RSI and MACD, but needs to get through its recent high to become more interesting.

Continued Faith in the Structure

Our Astronauts can do this because on the transition to space the structure of the rocket held. The building blocks that got the market where it is, Materials Select Sector SPDR, XLB, Industrials Select Sector SPDR, XLI, and Technology Select Sector SPDR, XLK have held at highs and continue to have a positive outlook. Look at the chart for XLI below as an example.

Industrials Select Sector SPDR, XLI

This is the best of the three and shows a steady trend higher with rising RSI and MACD. It also has some stress to it with that RSI getting close to 80, but a stress of the infrastructure as it breaks into orbit should be expected. The trend is clearly higher.

Monitor the Emergency Power

The Commander continues to monitor all the sources and uses of power, including the emergency power, even though he never wants to use it to run the spaceship. This emergency power is like the Utilities Select Sector SPDR, XLU. XLU has been generally sideways between 30.50 and 32 since September. Having XLU as a participant in the market rise is great but if it turns to being a leader that is not healthy. Currently the XLU has been in a symmetrical triangle making it a bit more interesting and is near the 2/3 point to the apex. A break out higher would have a target of 32.70 and a break lower would suggest it stays in its range with a target at the 100day SMA near 31.40.

So it is business as normal now that the space ship is in orbit and looks to continue as long as there are no emergencies that crop up. Look for the XLF, and XLY to continue to lead higher and the XLE to rest until it is needed for future maneuvers.

Sector Review: Four Themes from the Week

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