Diverging and Correlating Oscillator and Indicator Signals (Don’t be Afraid)

Last night’s Macro Review/Preview showed that there has been a rotation from small caps to large caps that looks to continue. But what sectors should outperform others in the short run? The Relative Strength Index (RSI) and Moving Average Convergence Divergence (MACD) indicator are giving some clues through their correlations and divergences. No wait, keep reading this is not technical.

Correlating is Just Moving Together

There are 4 sectors where the RSI and MACD are moving together with the price action. These sectors are showing the strongest trend, as everything is lined up and moving in the same direction. The pieces are correlated. Of course the trend can be either up down or sideways. The first group Consumer Staples Select Sector SPDR, XLP, and Utilities Select Sector SPDR, XLU are trending higher. Below is the chart for XLP for illustration.

Consumer Staples Select Sector SPDR, XLP

Notice in this chart how the price and Simple Moving Averages (SMA’s) are trending higher over the last three weeks. From the upper panel the RSI has also moved from the mid line and is heading higher. Finally the MACD indicator (the green bars) has become less negative and is about to turn positive, with the Exponential Moving Averages (EMA’s) about to show a bullish cross. This is an strong example of correlation among all the tools and therefore an example of a strong trend.

There are also some sectors with strong trends lower. These are Materials Select Sector SPDR, XLB, and Technology Select Sector SPDR, XLK. Below is the chart for XLK.

Technology Select Sector SPDR, XLK

This chart is almost the opposite of the XLP chart above. The price action has turned lower. The RSI has a steep negative slope and is heading lower, and the MACD indicator has turned negative and is about to show a bearish cross of the EMA’s. These sectors are pointing to a strong downtrend, at least for now.

Where Diverging is Moving Apart

The other five sectors, Energy Select Sector SPDR, XLE, Financials Select Sector SPDR, XLF, Industrials Select Sector SPDR, XLI, Health Care Select Sector SPDR, XLV and Consumer Discretionary Select Sector SPDR, XLY, are showing some disagreement between these tools. The RSI has been firmly in the bullish territory but the MACD has either flattened, is rolling over or is becoming more negative. Some of these sectors are showing fluctuations and multiple reversals of direction in recent activity. Two of these sectors are most interesting, XLV and XLY, as they look like they may be moving out of the uncertainty that comes with divergences. Watch them for continuation of a trend to develop. Below is the chart for XLV.

Health Care Select Sector SPDR, XLV

In this chart notice the 6 reversals in the direction of the RSI in the 3 weeks of the new year. But every time it has changed direction the RSI has been at either a lower high or a lower low. The RSI is trending lower. Notice also the MACD indicator had a wide low rounded mound but just went slightly negative. There was also a MACD cross a few days ago. Along with these the price is leveling and may be topping. XLV is showing signs of a down turn.

So as you prepare for the week head, do so knowing that large caps look stronger than small caps and that within those parameters Staples and Utilities look the strongest with Materials and Technology the weakest.

Trade’m well.

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

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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.

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