Whatever Floats Your Boat: Sector Review

• Posted by Greg Harmon
• on June 5th, 2011

It is getting hot outside so many people are flocking to the water to stay cool. The pool, the lake, the beach, it does not matter which, this is the time of year to enjoy it. Some just sit there and watch the activity but many others get out on the water in a boat. And just like the many SPDR Select Sector ETF’s there are many types of boat to choose from. All have strengths and weaknesses. Like these characteristics in boats there were a lot of similarities in the SPDR Select Sector charts this week. Since it is still Spring the changeable weather can force you to seek shelter quickly, both in the market and the water. How quickly you can gain security by reversing course and returning to shore is important. Every SPDR sector looks vulnerable to more downside yet they all had some signs of potential reversal of the downward moves. How quickly they can turn is like the difference in how quickly a boat can turn. There are Cigar boats and kayaks that can turn on a dime, catamarans that need the help of the wind, and cruise ships that take miles to turn. Which sectors will turn like these boats?

Cigar Boat

One sector, Energy Select Sector SPDR,$XLE, is proving itself to be very much like a Cigar boat both turning quickly and gathering new momentum. It is the only

Energy Select Sector SPDR,$XLE

sector that closed the week back above its 20 day Simple Moving Average (SMA) printing a Bullish Engulfing Candle on Friday. It is one of two sectors that did not make a new low. It also is the only sector to maintain a positive Moving Average Convergence Divergence (MACD) indicator. It still has downside risk with that MACD declining and the Relative Strength Index (RSI) flattening at the mid line after a move back higher. Watch the Bollinger bands as they tighten as a timing indicator for the next move. This looks the strongest going into next week.

Kayak

The Materials Select Sector SPDR,$XLB, is similar to the XLE but does not show the same strength. It did reverse quickly but without the same thrust. More

Materials Select Sector SPDR,$XLB

like a kayak than a Cigar boat. It also did not make a new low and printed a bullish Hollow Red candle Friday. The RSI and MACD show continued downside risk but 37.70 – 38.00 has been support many times recently. XLB is is on the edge after turning, and like a kayaker, needs to start paddling to move again.

Catamaran

The next group are like a bunch of catamarans trying to turn into the wind. They have been leaders before so like a catamaran you know once they have turned they can run. But the turn itself may take some time without playing the wind right. This group contains the Consumer Staples Select Sector SPDR,$XLP, Utilities Select Sector SPDR,$XLU and Health Care Select Sector SPDR,$XLV. Using the chart for XLP to illustrate, each had a group of strong gapping

Consumer Staples Select Sector SPDR,$XLP

down red candles but finished the week with a stall and a potential reversal candle. For the XLP it is a doji, and Hollow Red Morning Stars for the other two. These candles give a signal of a slowing of the descent as they all finished just below the bottom Bollinger band with the 100 day SMA near by below. The RSI and MACD for each suggest that there could be more downside, and each did make a lower low for the week. They are fighting the wind to turn.

Cruise Ship

The final four groups Financials Select Sector SPDR,$XLF, Industrials Select Sector SPDR,$XLI, Technology Select Sector SPDR,$XLK and Consumer Discretionary Select Sector SPDR,$XLY are acting like huge cruise ships that have been heading in one direction. Roaming the big Ocean these enormous floating towns vary in their quickness to turn. Using the XLF to illustrate, each has been in either a wide descending channel or

Financials Select Sector SPDR,$XLF

expanding wedge, hitting the bottom of that range on Friday with an inverted hammer making a lower low. The XLY is a bit worse having fallen though its descending channel, but finishing outside of the Bollinger bands and with decreasing volume on the 3 day plunge. But it is also the farthest above its 200 day SMA. The XLI and XLK finished at the Bollinger band bottom also with declining volume. Both are mid way between the 100 and 200 day SMA. The XLF is so bad it is starting to look good sitting on long term support/resistance well below the 200 day SMA. Almost like it never tried to turn from the storm and may emerge out the other side. All have RSI that is looking lower with the XLF the lowest and starting to flatten. All also have MACD that is growing more negative. Look for the XLF to be the first behemoth to turn with the others following.

As the uncertainty of the trend continues, look to the quick turning and explosive XLE and its less powerful sidekick XLB as a guide for a short term indication of a move. If the cruise lines turn around then it should be safe to pile back in long.

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