Two Sectors Breaking Out

The broad based rally on hopes that Greece’s debt deal would be finalized pushed all of the major averages to solid gains Monday as the advancing stocks led the decliners by almost a 3-1 margin. The Nasdaq 100 led the way up 1.72% followed by almost 1.50% gains in the S&P 500 and the Russell 2000. The VIX dropped another 18% after a similar drop last Friday.

There has been some improvement in the technical studies as the daily NYSE A/D line has moved back above its WMA but it is still below its short term downtrend. The McClellan oscillator has risen to +173 which is its best reading since last October. This combined with the high ARMS Index reading of 3.23 last week is a sign that I may have been too skeptical of the rally potential last Friday.

We will be better able to ascertain the strength of the rally once we get the first pullback which should happen this week. Even if last week’s rally is able to push the market above the previous highs, sector selection will still be the key.

sector714

There has been a wide gap in the performance of the sector ETFS this year as this % Performance chart illustrates. The Health Care Sector Select (XLV) and Consumer Discretionary Sector Select (XLY) are both up over 10% as they have solidly outperformed the 2.11% gain in the Spyder Trust (SPY).

In contrast the Industrials Sector Select (XLI) is down 3.1% while the Materials Sector Select (XLB) has done a bit better as it is down just 0.88%.

Table714

Five of the sector ETFS that I regular monitor closed last Friday below their quarterly pivots (highlighted in read) which is a sign of weakness. This included the Technology Sector Select (XLK), Energy Sector Select (XLE), iShares DJ Transportation (IYT) in addition to XLI and XLB. Therefore this week’s close will be important as these ETFs need to close back above these pivots to signal a potential trend change.

As the table indicates the monthly and weekly technical studies are negative on all five of these ETFs. Last week, XLE, XLI and XLK all formed doji’s last week so there is the potential for them to trigger high closed doji buy signals in the next few weeks,

XLY714

The Consumer Discretionary Sector Select (XLY) gapped higher on Monday and is trading above the June high of $78.31. A close at current levels or higher would be above the resistance at line a.

  • The next upside targets are in the $80.60-$81which corresponds to the quarterly resistance and the weekly starc+ band.
  • The weekly relative performance moved through its resistance, line b, over four weeks ago which suggesting prices would then follow.
  • The OBV also moved to new highs for the year as it surpassed the resistance at line c.
  • There is initial support now in the $78 area with the rising 20 day EMA at $77.33

The Health Care Sector Select (XLV) also gapped higher on Monday but is still below the June high of $77.66.

  • There is trend line resistance , line d, and the daily starc+ band in the $77 area.
  • The weekly starc+ band is at $79.06 with the quarterly pivot resistance at $79.65.
  • The relative performance moved to new highs in June as the resistance at line e, was overcome.
  • The weekly OBV also moved to new highs at the same time and then pulled back to its support (see arrow) before the latest surge.
  • The 20 day EMA has turned up and is now at $75.10 with the quarterly pivot at $74.05.

XLBXLI714

The weekly closes below the quarterly pivots reinforces the weak monthly charts for the Materials Select Sector (XLB) and the Industrials Select Sector (XLI).

The Materials Select Sector (XLB) formed a low close doji in June with the 20 week EMA and the monthly pivot support at $46.44. The relative performance has been in a downtrend since 2014 indicating that it has been underperforming the S&P 500. The OBV has been below its WMA since last October.

The Industrials Select Sector (XLI) formed dojis in both April and May. XLI triggered a low close doji in June with the monthly EMA and pivot support in the $52-$52.50 area. The relative performance formed a negative divergence in early 2015 as it failed to make a new high with prices, line b. The weekly OBV dropped below its WMA in April and still is below its WMA.

What to do? Both the XLY and XLV are a bit overextended on a short term basis as both are trading higher early Tuesday. This makes the risk a bit high at current levels on new positions. The safest place for stops would be under the June lows.

There needs to be improvement in the weekly technical studies before I would be looking to buy either the Materials Select Sector (XLB) or the Industrials Select Sector (XLI).