Last week a special edition report was released focusing on the US Energy Sector, via the iShares US Energy ETF (IYE). Relatively speaking, it appears that it has landed support at a technically significant level, which could set the stage for a sustainable cycle of outperformance.
On the other hand, there were a number of negative outside week patterns in other sector funds. This technical pattern could be subtly hinting that some kind of distribution forces are at work. These patterns were evident with the iShares DJ U.S Telecom ETF (IYZ) as well as the Technology/Financials/Consumer Discretionary/Utilities/Materials Select SPDR Funds (XLK/XLF/XLY/XLU/XLB).
As these sectors account for 55.7% of both the S&P 500 and this Domestic ETF Portfolio it can have a noticeable impact on the performance of the overall market.
However, as the April Technical Guide to the SPDR S&P 500 ETF noted, although this rally may be in its latter stages, a discernible market top has yet to be unearthed. Continued sector divergence might help signal a more meaningful turn in the market.
Technology Select Sector SPDR Fund (XLK) – An overbought condition coupled with an inability to push through the May 2013 high (32.31) and a violation of the steep Apr 2013 uptrend line warned of profit taking. The selling was strong as evident by the large 5/22/13 negative outside day pattern, which was followed up by a negative outside week. However, this still has the makings of profit taking and not a trend reversal.
Financial Select Sector SPDR Fund (XLF) – XLF poked its head through the top of the 2011 uptrend channel near 20 before a negative outside day pattern developed. In that respect initial resistance is expanded to the May 2013 high (20.35). A breakout could accelerate a move towards 22 or the 50% Fibonacci retracement of the 2007-2009 decline. Initial support at 18.68 corresponds to the bottom of the 5/2/13 upside gap.
Health Care Select Sector SPDR Fund (XLV) – From a relative strength perspective, XLV began to accelerate to the upside during Mar-Apr 2013. As a result, the velocity of the uptrend had become unsustainable. It would not be surprising if XLV began to gravitate back towards these more sustainable trend lines. In the meantime, manage risk appropriately. Initial support remains at the Apr 2013 high (48.38).
Consumer Discretionary Select Sector SPDR Fund (XLY) – XLY briefly pushed through the top of its 2009 uptrend channel near 57 before the 5/22/13 negative outside day and the 5/24/13 negative outside week warned of a paused in the rally. This sector ETF now is resting on top of the uptrend channel. Failure to find support here allows for a move to next support at 54.88 or the bottom of the 5/2/13 upside gap.
Consumer Staples Select Sector SPDR Fund (XLP) – During times of uncertainty investors have a tendency to gravitate towards the relative safety of defensive sectors. However, last week’s bounce in relative strength still has the mark of an oversold rally. With that said, initial support has been adjusted to 39.50-40.50 or the Apr 2013 low and the 50-day moving average. The May 2013 high (42.20) is initial resistance.
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Energy Select Sector SPDR Fund (XLE) – Two bullish events hve recently unfolded, which allow for an overweight allocation. This first was the ability to find support at the botom of a large descending triagle on the relative strength chart. The second was the technical breakout of an ascending triangle on the price chart. In order to protect profits, initial support rises to the breakout level near 80. To the upside, XLE now has its sights on the 90-91.50 range.
Industrial Select Sector SPDR Fund (XLI) – Two bullish events have recently unfolded, which allow for an overweight allocation. This first was the ability to find support at the bottom of a large descending triangle on the relative strength chart. The second was the technical breakout of an ascending triangle on the price chart. In order to protect profits, initial support rises to the breakout level near 80. To the upside, XLE now has its sights on the 90-91.50 range.
Utilities Select Sector SPDR Fund (XLU) – Over the last month or so XLU has gone from overbought to oversold. In the process there has been technical damage to the chart. For instance, last week’s negative outside week and the head ad shoulders top breakdown suggest further price weakness. There was also a relative strength breakdown. Therefore, until the damage has been repaired, bounces should be view as unsustainable. [Utilities ETFs Showing Signs of Wear]
Materials Select Sector SPDR Fund (XLB) – From a relative strength perspective XLB needs to clear its Mar 2013 breakdown level to repair the technical damage. The 5/22/13 negative outside day and the 5/24/13 negative outside week are signaling that some kind of correction is in order. Looking out a little longer-term and the failure to clear the May 2013 high could form the second half of a head and shoulders top. Neckline resides near 37-37.35.
iShares Dow Jones US Telecom Index (IYZ) – IYZ touched upon its Jun 2008 high (27.50) before a 5/22/13 negative outside day and a 5/24/13 negative outside week formed and profit taking arose. From a relative strength perspective it also appears that IYZ has broken own from a head and shoulders top. Initial support remains at the Apr 2013 breakout level near 26-26.25. Failure to maintain support allows for a move towards the 4/17/13 low (25.35).
J. Beck Investments is an independent provider of technical research for ETFs.