Sector ETF Technical Update

Last week the S&P 500 came within 6 points of the 2007 peak as it has completed its 48th 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 (NYSEArca: 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 (NYSEArca: 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 (NYSEArca: 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 (NYSEArca: 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.