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.