SPDR Sector Review/Preview September 18, 2010

In my review of the SPDR sectors this morning I noticed again that then could be separated into 3 groups based upon their recent price performance. Each chart has some interesting technicals associated with it that I have detailed previously on chart.ly and in my twitter stream so I will not go into those details here. I will focus here on the relative strength of each sector from the recent price history. The first and strongest group contains Technology, XLK and Consumer Staples, XLP. These charts show strong uptrends since bottoming in the beginning of September.

Technology Select Sector SPDR, XLK
Consumer Staples Select Sector SPDR, XLP
The XLK has just completed an bullish Inverse Head and Shoulders pattern but sits near 22.62 resistance from June with resistance at 24 higher and a target from the pattern at 24.75. It also printed a bearish Hanging Man Friday though. The question for XLK in the future is whether the Hanging Man or the Inverse Head and Shoulders is confirmed. The XLP tagged the March-April resistance at 27.80 but stalled there. It has clear air above it if it can get through. Both charts show support areas at the highs in August and below that at their respective Simple Moving Averages (SMA's). Both show that the shorter SMA's the 20 and 50 day are rising, to or through a falling 100 day SMA and a flattening 200 day SMA. This is positive for prices. But both also show and waning Moving Average Convergence Divergence (MACD) and flattening Relative Strength Index (RSI) suggesting the upward moves may be running out of steam. Remember these are the strongest sectors, but have shown their first sign of weakness.

The second group shows a few more signs of sluggishness and contains Health Care, XLV, Consumer Discretionary, XLY, Materials, XLB and Industrials, XLI.

Health Care Select Sector SPDR, XLV
Consumer Discretionary Select Sector SPDR, XLY
Materials Select Sector SPDR, XLB

Industrials Select Sector SPDR, XLI
These sectors are all at or near resistance. But more significantly they are all showing various degrees of flagging at that resistance. XLV is just beginning at the one extreme and XLB and XLI have been flagging for a week or more, at the other end. Three of them nearly printed bearish Hanging Man candles Friday, with long shadows showing signs of selling pressure emerging, with the fourth having a flat out bearish day Friday. They all exhibit a flattening or falling RSI and a MACD that has been declining for several days. The SMA's on the short end are upward sloping, so they may snap out of this flattening. But they are showing signs of waning strength at least.

The third group is the weakest and includes Financials, XLF, Energy, XLE and Utilities, XLU. Take special notice to the fact that the Utilities sector, which has been the strongest as recently as two weeks ago is now one of the weakest.

Financials Select Sector SPDR, XLF
Energy Select Sector SPDR, XLE
Utilities Select Sector SPDR, XLU
All three had there high point on Monday (XLE briefly higher in Tuesday) and fell through the week. It is possible that the price action could be a bull flag for XLF and XLE but, all three printed bearish engulfing candles on Friday, suggesting more downside. Also, all have decidedly downward trending RSI and MACD indicators. The first two, XLF and XLE, had shown good runs higher previously, ending near the 200 day SMA and are now tracking the falling 100 day SMA lower. These two have been bouncing in a range for 4 months and the recent top was near the top of that range. XLU has the worst looking momentum indicators with MACD that crossed lower this week and RSI that has been falling for over a week. Putting a little confusion into the mix, all three sectors have rising short term SMA's, which could give them a lift.

As you look through theses charts note that their positioning is deliberate and intentional. They exhibit a progression from a strong uptrend to a flattening and then a potential downward reversal. Some of the sectors that have been leaders are stalling and pulling back. This is not a prediction that the rally that has taken the market to test its recent highs is over. One week's action does not create a trend or a change. I do however think that there is a message in the rotation. Having Technology and not Utilities lead the way is a good omen for future market strength if it holds up. But it also shows that there are sectors like Financials that need to participate for a full blown rally, which are not currently, and Consumer Staples that you would not expect to lead a broad based rally, but are. Until this shift occurs we may be in for more of the same stumbling along for a while.

Trade'm well.