The S&P 500 suffered technical damage on the whole last week as a rare downside gap emerged on June 20. This bearish pattern takes a concerted effort of market participants to occur on a broad based average.
This also aided in the development of another bearish pattern known as a negative outside week. The inability to repair some of this damage quickly alludes to additional weakness ahead, at least on a near-term basis. It would also suggest a test of next support in the 1530-1540 range.
This support could begin to play an important role as it has the potential to become a neckline support of 150-160 point head and shoulders top pattern. Playing out this scenario would imply that the right shoulder takes another 2-months to develop should it be a legitimate and symmetrical pattern. With that being said, the damage was felt throughout each sector ETF, which is another sign that the pain was broadly felt.
Therefore, until reparations have been made there is the risk is to the downside.
Technology Select Sector SPDR Fund (XLK) – Heavy selling last week caused technical damage. For example, the 6/20/13 downside gap leaves initial resistance at 31.53. Secondary resistance moves down closer to the May 2013 high (32.31). A negative outside week pattern has also formed as a result of the distribution forces. Although XLK is somewhat oversold, initial support is now near 29, or the April 2013 low and the 2009 uptrend line.
Financial Select Sector SPDR Fund (XLF) – Despite some technical weakness last week, the intermediate-term picture remains the same. However, in order to manage risk appropriately, some levels have changed. Initial support now corresponds to the bottom of the 5/3/13 upside gap, while initial resistance moves down to the top of the 6/20/13 downside gap (19.58). Traders might play a trading range between these two levels.
Health Care Select Sector SPDR Fund (XLV) – From a relative strength perspective, XLV has held up fairly well as it continues to trade above initial support. However, the 6/21/13 negative outside week pattern as well as the potential head and shoulders top that has been forming warn of distribution forces at work. Neckline support which seems to reside near the 4/18/13 low (46.76) is holding for now. The head corresponds to the May 2013 high (50.40).
Consumer Discretionary Select Sector SPDR Fund (XLY) – XLY still maintains its leadership role amongst many other sector ETFs. In fact, XLY is attempting to make another relative strength breakout. With that said, it was not immune to the selling pressure across the board last week. As a result, initial resistance needs to be adjusted down to the top of the 6/20/13 gap (56.58). On the other hand the April 2013 high (54.41) is initial support.