Sector ETF Technical Outlook

Health Care Select Sector SPDR Fund (XLV) –  Although the longer-term trends in XLV still are favorable, the recent underperformance has been sharp and it is diverging from other sector funds as it trades below its Apr. 2013 high (48.38).  A small head and shoulders top may also be forming, which may allude to further underperformance.  A Neutral stance is recommended at this point. Initial support remains 46.02 or the Apr. 2013 low.

Consumer Discretionary Select Sector SPDR Fund (XLY) – A steady rise in both absolute and relative terms has been the theme for XLY for some time now.  The key is going to be protecting profits and managing risk. As a result, initial support is rising to the 50-day moving average near 52.70. To the upside, it still appears that XLY is headed for a test of the top of its 2009 uptrend channel near 56.  A breakout allows for a move towards psychological supply at 60.

Consumer Staples Select Sector SPDR Fund (XLP) – The sharp relative strength pullback over the last couple of weeks has brought XLP back below its technical breakout level.  This false breakout and resuls in the removal of the overweight allocation at this time.  However, from an absolute perspective, not much has change and the dominant trend still favors higher prices.  Weakening relative strength but a bullish price chart bodes well for the market as a whole.

Energy Select Sector SPDR Fund (XLE) –  Despite the sharp rally last Friday, XLE still needs technical improvements in order to suggest a sustainable turn for the better has been made.  For example, formidable supply still remains near 80-81 or the Jan. 2008/2011/2013 highs. The other is that the Feb. 2013 relative strength downtrend is still intact despite the upturn over the last couple of weeks.  This sector has to prove that this rally is real.

Industrial Select Sector SPDR Fund (XLI) –  XLI neared a technical breakout above 42.16 but then pulled back to close just below it.   A move through this resistance opens the door for a move into the mid-40s or a technical target based on this 2-month head and shoulders bottom pattern.  With that said, further improvement is needed from a relative perspective to call for even a tactical shift at his point.  Longer-term, XLI still looks to underperform.

Utilities Select Sector SPDR Fund (XLU) – XLU has been one of the top performing sector funds this year.  However, the sharp relative strength reversal, the inability to push through formidable supply near 42 and the heavy volume distribution day on 5/3/13 suggest that a tactical slow down is in order.  To the downside, initial support is at the 4/16/13 pivot low (39.61).  Secondary support is near the Aug. 2102 high and Mar. 2013 breakout of 38-38.50.

Materials Select Sector SPDR Fund (XLB) –  Despite the strong rally over the last two weeks or so, the technical landscape for XLB has not changed.  A broad sideways trading continues in a well-defined range defined by the Jan/Mar. 2013 highs near 39.50-40 and the Feb/Apr. 2013 lows closer to 37-37.35. The danger to this range is that it may still be a potential head and shoulders/triple top. A move above the top of this range could set into motion a rally to the 2011 high (41.28).

iShares Dow Jones US Telecom Index (IYZ) – This Telecom Index has outperformed dramatically over the last month and some kind of pullback was in order.  It may turn out that the violation of the Apr. 2013 relative strength uptrend line was an early warning, but given the steepness of that trend, it may be premature to make that call. In other words, a more reasonable upward trajectory may be developing. IYZ is also maintaining its Apr. 2013 breakout support.

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