Sector ETF Technical Outlook

ETF Trends

The S&P 500 has fallen roughly 4% from the April 2013 high (1597.35) to its April 2013 low (1536.03).  On its own merits, this should not be surprising or even worrisome given the impressive 9% gain YTD or the 140% rally since 2009.

With that said, a potential small head and shoulders top pattern on the chart alludes to more weakness before the onset of another rally.  Should there be a confirmed violation of neckline support, your accounts need to be positioned in such a way to take advantage of what could be the final rally in this 5-year old cyclical bull market.

The work in this report highlights what the charts are anticipating to be the leading sectors in such a rally.  For the most part, it appears that the “smart money” is rotating into the defensive areas and the relative strength studies suggest that these are sustainable shifts.  In other words, the outperformance of these areas looks to continue into the foreseeable future.  Being situated in the right sectors is what is going to drive your benchmark outperformance.

Technology Select Sector SPDR Fund (XLK) – A breakout from a small trading range ran into resistance at the Apr. 2012 high ( 30.62 ) before selling off.  It is interesting how that level corresponds to the left shoulder of a 15-month head and shoulders top pattern.  Failure to break through this level suggests the formation of the right shoulder.  What also needs to be watched this month is the potential for a bearish negative outside month pattern.

Financial Select Sector SPDR Fund (XLF) –  XLF is approaching initial support at 17.77 or the Apr. 2013 low.  Although the ability to maintain this support may appear constructive, it may also solidify neckline support of some kind of head and shoulders top.  It would take a move above the Apr. 2013 high ( 18.65 ) to negate this pattern. From a relative strength perspective it also appears that a head and shoulders top has been forming since the beginning of the year.

Health Care Select Sector SPDR Fund (XLV) –  From both an absolute and a relative perspective XLV has been at the top of its class this year. A steady outperformer throughout the year and a superstar of late.  The price chart has also been impressive as the nearly 20% YTD gain has barely seen a pause.  Granted it may be difficult to buy in at the current level, but using supports in order to protect profits should be adhered to.

Consumer Discretionary Select Sector SPDR Fund (XLY) – The dominant trend remains up, however some near-term rumblings may be going on under the surface.  Specifically, it appears that there is a potential head and shoulders top forming over the last month or so.  Neckline support looks to be near the Mar. 2013 low ( 51.47 ).  A violation of support opens the door for a move to the Feb. 2013 low ( 49.40 ).  The Apr. 2013 high ( 54.41 ) is now initial resistance.

Consumer Staples Select Sector SPDR Fund (XLP) – A large relative strength symmetrical triangle has been ongoing since 2011.  Long only equity portfolios could have would have benefitted from navigating their allocation to XLP as this pattern dictated.  It appears that XLP has resolved this pattern as it broke out last week.  This could have significant technical implications as it suggests sustained outperformance in XLP and a shift to this defensive sector ETF.

Energy Select Sector SPDR Fund (XLE) –  XLE broke through support near 75.50-76 and in the process it has flattened out the 30-week moving average and turned down the 10-week moving average.  Traders may use this breakdown level as initial resistance.  For this report, initial resistance now corresponds to the top of the 4/15/13 downside gap and the 50-day/10-week moving averages.  Initial support is now the bottom of the 1/2/13 downside gap ( 71.44 ).

Industrial Select Sector SPDR Fund (XLI) –  XLI is now sitting on initial support  near 40 or the Feb. 2013 low. A violation of this support may require a portfolio adjustment as it opens the door for a move towards next support near 38-38.50 .  To the upside, initial resistance continues to reside at the Mar. 2013 high ( 42.16 ).  From a relative strength perspective, weakness continues to prevail since the Mar. 2013 technical breakdown vs. SPX.

Utilities Select Sector SPDR Fund (XLU) – Initial resistance at 40 , although purely psychological, is being tested.  The ability to clear this supply opens the door for a move towards 42 or near the May 2008 high and the top of the 2009 uptrend channel.  With that said, the story seems to really be on the relative strength chart as XLU is also attempting to breakout above the Nov. 2012 high as well as the 2011 downtrend.  In doing so, this calls for continued outperformance.

Materials Select Sector SPDR Fund (XLB) –  XLB is threatening a breakdown form a 3.5 month double top formation and the violation of key initial support near 37-37.35 .  This support zone corresponds to the Feb. 2013 low, the converged 10/30-month moving averages, and the Oct. 2011 uptrend line.  To the upside, initial resistance is tweaked down to 39.50-40 or the Apr. 2013 high and the Jan/Mar. 2013 highs.

iShares Dow Jones US Telecom Index (IYZ) – It appears that IYZ is coming up to a major test of resistance near 26.25 or the Sep. 2013 high and also near the 61.8% Fibonacci retracement of the 2007-2008 decline ( 26.57 ).  From a relative strength perspective, IYZ has also rallied sharply. Although not an optimal entry level, from a portfolio perspective, an overweight stance is warranted.  To protect profits, initial support remains near the Apr. 2013 breakout level ( 25.27 ).

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

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