Energy Did Not Kill the Rock Star Rally

• Posted by Greg Harmon
• on March 12th, 2011

Video may have killed the Radio Star but the Energy sector did not kill this Rock Star market rally. In fact the strength in Energy masked the correction that began two weeks ago. The charts of the SPDR Sector funds readily show the current lead singers as the defensive old guard sectors and the recent young phenoms dragging things lower, with the superstar sector finally falling from grace. Like a world where a comeback tour of The Buggles has been beating back the Katy Perry’s and Rihanna’s and is now finally surpassing Lady Gaga! Look at the evidence.

The Buggles

This group of leaders is made up of the Consumer Staples Select Sector SPDR, XLP, Utilities Select Sector SPDR, XLU and Health Care Select Sector SPDR, XLV. The chart of XLU below illustrates the strength of these sectors. All are above their 20 day Simple Moving Average (SMA), have a firmly bullish Relative Strength Index (RSI), and a positive Moving Average Convergence Divergence (MACD) indicator.

Utilities Select Sector SPDR, XLU

Additionally each of these sectors is in the top half of expanding Bollinger bands. XLU is the strongest chart on a daily timeframe, despite its minimal pullback. Can Utilities lead the market higher?

Katy Perry’s and Rihanna’s

This group contains Materials Select Sector SPDR, XLB, Financials Select Sector SPDR, XLF, Industrials Select Sector SPDR, XLI, Technology Select Sector SPDR, XLK and Consumer Discretionary Select Sector SPDR, XLY. These sectors started to show the limits of their talents two weeks ago, when some started following the market and others just flat lined. The chart of XLB below shows their shortcomings. All of these sectors are below their 20 day SMA and half are below the 50 day SMA as well. All have an RSI that is either below the mid line or vacillating around it while the MACD shows the parallel move lower in the signal and the Exponential Moving Average (EMA) differential plots.

Materials Select Sector SPDR, XLB

Finally this group are all in the bottom half of expanding Bollinger bands. All these indicators suggest more downside and show that the move lower was underway well before the Energy sector fell. The one bright spot is that each also printed a bullish engulfing candle on Friday. These need to be confirmed by a move higher to signal a trend reversal higher. But hey they are rock stars, not one hit wonders, so a turn around can happen.

Lady Gaga

The Energy Select Sector SPDR, XLE, has been the Lady Gaga of the market, day in and day out giving another outrageous performance rising even higher then the last day. But this sector finally losing favor. Must have seen the intro to the Born This Way video. In the span of one week the XLE crashed from Super Star status. Reminds me of last week’s sector review (link below). The chart (below) had a strongly bullish RSI and has well above the 20 day SMA near the top of the Bollinger bands when the week began. By the close Friday it finished below the 20 day SMA after testing the 50 day SMA, with an RSI below the mid line and and MACD going parabolic in the negative direction.

Energy Select Sector SPDR, XLE

There is hope though as the Energy sector also printed a bullish engulfing candle on Friday, and come on the intro may have been creepy but the song was pretty good.

The fall in the Energy sector this week just made it easier to see that the rest of the market had already started lower. Watch now to see if the bullish engulfing candles are confirmed and the downtrend reverses or if the move lower continues. XLE, like Lady Gaga will continue to be a leader, the question is in which direction.

Charlie Sheen is the XLE – WINNING!

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Video Killed the Radio Star: The Buggles 1979

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