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.
Energy Select Sector SPDR Fund (XLE) – Although there appears to be the potential for additional relative and absolute weakness, the intermediate to longer-term picture still looks favorable. For example, trading above its February 2013 price breakout in the mid-70s and its April 2013 relative strength support point to continued leadership over time. With that said the 6/21/13 negative outside week and the 6/20/13 downside gap allude to near-term weakness.
Consumer Staples Select Sector SPDR Fund (XLP) – Although it appears that investors have gravitated towards the relative safety of this low beta ETF, XLP still needs further repair to suggest sustainable leadership. For example, the 5/31/13 negative outside week, the violation of the January 2013 uptrend line, and the recently turned down 10-week moving average have weakened its technical condition. Initial supply moves down closer to 41.
Industrial Select Sector SPDR Fund (XLI) – From a relative strength perspective, XLI is coming up on a major test as it approaches the 2011 downtrend line. The ability to breakout would be technically significant as it suggests that this ETF is emerging as a leadership sector fund. On the other hand, failure to convincingly push through resistance could begin the next underperformance cycle. Therefore this inflection point needs to be monitored closely.
Materials Select Sector SPDR Fund (XLB) – Granted the sharp decline last week has caused technical damage to the chart like the 6/20/13 downside gap and the negative outside week, but there may be bigger cause for concern. It appears now that XLB is head for what could be neckline support of a head and shoulders top pattern near 37.10. Manage portfolio risk accordingly as the ability to hold this support may just help build the right shoulders.
Utilities Select Sector SPDR Fund (XLU) – The May 2013 head and shoulders top breakdown warned of weakness.. XLU has since met its technical downside projection but has broken down again last week. XLU can still decline somewhat more as it approaches a key level of support near 35, which corresponds to the 2009 uptrend and the 30-month moving average. To the upside, initial support drops to the top of the 6/20/13 downside gap (37.49).
iShares Dow Jones US Telecom Index (IYZ) – IYZ is now testing support at the 150-day moving average near 25. A violation here opens the door for a test of the March 2013 low of 23.61. To the upside, initial support moves down to the recent breakdown level and the top of the 6/20/13 downside gap (25.72). From a relative strength perspective, the recent decline is somewhat concerning, but it may take a move below the April 2013 low to trigger a reallocation.
J. Beck Investments is an independent provider of technical research for ETFs.