Sector ETF Technical Update

ETF Trends

Last week the S&P 500 came within 6 points of the 2007 peak as it has completed its 48 th month of this cyclical bull market.

The bulls and the bears are going to start coming out of the woodwork.  The bulls will clamor that we are launching into the next structural bull market, while the bears will warn of a major market peak.

The technical evidence suggests that they are both off base.  The bulls are correct that this market can still sustain somewhat higher, but wrong that this is the start of a structural bull.

The bears have it right that we are headed into a deeper and more extensive decline (or worse, the next cyclical bear market), but they are off on the timing.

The sector work done in this report concludes that apart from the Technology Select SPDR Fund (XLK), most of the larger sectors remain healthy and can carry the overall market higher.  However, it appears that investors are gravitating away from the more economically sensitive areas of the market.

Technology Select Sector SPDR Fund (XLK) – Another relative strength breakdown last week as XLK made another lower low on the chart.  Although price performance was relatively flat, this looks to be a technical warning signal. A violation of initial support near 29.75 would be additional evidence of the development of a right shoulder of a 1-year head and shoulders top.   On the other hand, it will take a move above the left shoulder ( 30.62 ) to alleviate the pressure.

Health Care Select Sector SPDR Fund (XLV) –  Although trading at extreme overbought levels on both a daily and weekly basis, the surge in relative strength coupled with a price breakout warrant an increased allocation.  Initial support rises to the recent breakout level of 45.10 and secondary support becomes 43.75 or the Feb. 2013 high and the 50-day moving average.  Pullbacks should represent buying opportunities.

Consumer Discretionary Select Sector SPDR Fund (XLY) – XLY is again testing initial resistance near 53 or its technical target based on the Jan/Feb. 2013 breakout.  The ability to clear this resistance sets into motion a move towards the top of the 2009 uptrend channel near 56 .  On the other hand, relative strength has not quite reached its prior high.  This may be a minor negative divergence, but not a concern until initial support near 51.23 has been violated.

Consumer Staples Select Sector SPDR Fund (XLP) – Another new high has been made.  XLP is now up some 106% since the 2009 bottom vs. the S&P 500 rally of 133%.  However, as the month and quarter come to a close, XLP has outperformed on both measures. With that said, an overbought condition exists so a pullback at any time should not be surprising.  Initial support rises to the recent breakout level near 38.90 .

Energy Select Sector SPDR Fund (XLE) –  XLE is once again testing a significant initial resistance in the 80-81 range or the Apr/Jul. 2011 highs.  A move above here opens the door for a move towards psychological supply at 90 and the 2008 peak of 91.42 .  With that said, the decline in relative strength over the last couple of months is suggesting that other sector opportunities should prevail.

Industrial Select Sector SPDR Fund (XLI) –  The Jan. 2013 breakout of the large 2011 symmetrical triangle pattern led to a powerful rally that briefly surpassed the 2007 peak ( 41.99 ).  However, from a relative strength perspective, XLI started to turn down at the end of Feb. 2013.  It would likely take a convincing move above the 2007 high coupled with a reversal in relative strength to confirm a major technical breakout and the emergence of leadership.

Utilities Select Sector SPDR Fund (XLU) – The explosive move on 3/28/13 has surged through resistance corresponding to the Aug. 2013 peak ( 38.54 ). This was coupled with a relative strength breakout, which suggests that this defensive sector is again in favor.  As a result, the portfolio’s allocation increases from +1%à+2%.  Also worth noting here is how this occurred on the backdrop of the negative outside month in 10-year US Treasury yields.

Materials Select Sector SPDR Fund (XLB) –  Although failure to push through initial resistance near 40 allows for the possibility of a double top formation, the real story here is the breakdown in relative strength. Relative strength actually peaked in Jan. 2013 before sharply selling off.  Last week, XLB broke down again as it slipped below the Sep. 2012 low.  This means that for the time being, any oversold rallies from a relative perspective are unsustainable.

iShares Dow Jones US Telecom Index (IYZ) – Things aren’t getting any easier for IYZ.  Some things to consider:  1) A Feb. 2013 negative outside month pattern, 2) a large 2/14/13 downside gap, 3) a 4-month head and shoulders top is forming, 3) the cross of the 10-week ma below the 30-week ma, and 4) IYZ it looks to be on the verge of another technical breakdown relative to the SPX.  A breakdown opens the door for a test of the 2008 uptrend line near 22.50 .

J. Beck Investments is an independent provider of technical research for ETFs.

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