Defenders Playing Offense & Former Leaders Exiled to an Island

As the fight for democracy and freedom continues to rage in Northern Africa and the Middle East, it is impacting the stock market daily. This past week the market recovered much of what it lost early but the underpinnings of battle are worth noticing. In some places, like the market, it is more obvious then others that leadership has changed but history shows that these battles can take a long time to play out. In the end the Leaders of LIBYAJE countries (Libya, Iraq, Bahrain, Yemen, Algeria, Jordan and Egypt) may be exiled to an island while those Defenders start Playing Offense, like what has happened in the market. The determination of the Masses will make the final decision. The consolidation playing out in the market is reflects some of these same characteristics.

Defenders Playing Offense

Three sectors, noted as being defensive sectors, have been in charge the past few weeks and continued to outperform this week. Like those uprising in LIBYAJE they fired the first shot and have some momentum. These are the Consumer Staples Select Sector SPDR,$XLP, Utilities Select Sector SPDR,$XLU and Health Care Select Sector SPDR,$XLV.

Consumer Staples Select Sector SPDR,$XLP

XLP, above, has been the ring leader and continues to make new highs. The rising Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) indicator, supporting more upside are present in all three sector ETFs. The Simple Moving Average’s (SMA) are rising for the XLP and XLV as well and may be starting for the XLU which had a big run to end the week. In the short term these sectors should continue to play offense.

LIBYAJE Leaders

Two sectors that have been leading for the entire market run higher, the Materials Select Sector SPDR,$XLB and the Energy Select Sector SPDR,$XLE have been paying the price for the defensive sector strength and this week were exiled to an island.

Energy Select Sector SPDR,$XLE

The chart of XLE above shows the gap down on Tuesday and consolidation, forming an island, also apparent in the chart of XLB. Like an exiled leader these patterns can resolve one of two ways: There may be another gap down and continuation or move lower as the leaders become less influential. Or they can move higher, sometimes with a gap up forming an island reversal pattern, and regain their strength. In this case the charts look biased to the reversal. The RSI has already reversed and the negative MACD has stalled and started to improve. Also the SMA’s all point higher. They may continue their exile on the island but watch for the plane leaving in the middle of the night to return to leadership. If this happens expect at least a consolidation from the current leaders, if not a loss of power.

The Masses

The rest of the sectors the Financials Select Sector SPDR,$XLF, Industrials Select Sector SPDR,$XLI, Technology Select Sector SPDR,$XLK and Consumer Discretionary Select Sector SPDR,$XLY have been keeping their heads down, occasionally making some noise here and there but seemingly waiting to the battle to end before deciding to be vocal.

Consumer Discretionary Select Sector SPDR,$XLY

The XLY chart above paints a good picture for the group. It has moved in roughly a 4% band either side of 38.50 for the last 3 months. The RSI has been flat lined at the mid line with an occasional move above and below, and the SMA’s are starting to converge. These sectors look to follow the market in the short term.

For short term performance stay in the heat of the confrontation with the Defenders Playing Offense and the LIBYAJE Leaders (strange the acronym can spell Lybia isn’t it). Keep an eye on the Masses so that when they jump in you are not left behind. Trade’m well.

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

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