Bull Flags Can Turn Into Downtrends – Sector Review 6/18/2011

Under the covers of the broad market the SPDR Sector Funds are pointing to more weakness when viewed from a weekly timeframe. But as always there is relative strength of some sectors over others. This week there are 3 distinct groups of sectors, those that are in Bull Flags, those Hanging On and those in Down Trends. Not really a rosy picture as those Bull Flags could easily turn into Down Trends.

Bull Flags

Three sectors fit into this group. They are the Consumer Staples Select Sector SPDR, $XLP, Utilities Select Sector SPDR, $XLU and Health Care Select Sector SPDR, $XLV. Using the $XLP to

Consumer Staples Select Sector SPDR, $XLP

illustrate, each of these sectors started a bull flag after hitting the top of the Bollinger bands 5 weeks ago. None have fallen to the mid point or as far as the 20 week Simple Moving Average yet. They are showing relative strength, and the $XLP in particular had a positive week. But there are some signs of weakness as well. The Relative Strength Index (RSI) is trending lower and the Moving Average Convergence Divergence (MACD) is about to cross negative for each. All show the potential for a turn in the RSI, and have had increasing volume the last two weeks, that may lift them higher out of the Bull Flag. Watch this group as the strongest places to look for long trades or smaller downside. Oh, by the way, these strong sectors are also known as the defensive sectors.

Hanging On

There are also three sectors that are Hanging On, at the edge of the cliff. These are the Financials Select Sector SPDR, $XLF, Industrials Select Sector SPDR, $XLI and Consumer Discretionary Select Sector SPDR, $XLY. Using the $XLF to illustrate, each sector has a MACD that

Financials Select Sector SPDR, $XLF

is growing more negative with volume has been increasing on the move lower. Bad signs. But each also has price at the edge of the lower Bollinger band which printed a indecisive doji candle for the week and RSI that has been trending down but now has a hook this week. Maybe a point to stop falling. Keep an eye on these sectors that are teetering on the edge for signs of the next move.

Down Trends

The final three sectors, Materials Select Sector SPDR, $XLB, Energy Select Sector SPDR, $XLE and Technology Select Sector SPDR, $XLK are in Down Trends that do not show signs of stopping. The

Energy Select Sector SPDR, $XLE

chart of the $XLE above illustrates the difference. As it is moving lower the red candles are all good size with little shadows. The RSI is straight out trending lower. The volume is increasing as it falls. The MACD is continuing to grow more negative. The Simple Moving Averages are starting to roll lower. Finally the Bollinger bands are rolling lower and starting to expand. No good signs in this group. This is the place to look for short ideas.

As the market battle plays out the differences between these groups suggest that there is more downside to come in the broad market. Bull Flags turning into Down Trends will be an easy tell. Good luck next week.

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