It is interesting how the May 23 negative outside day pattern marked a price high for the S&P 500. The subsequent June 20 downside gap and the June 21 negative outside week pattern confirmed that concerted distribution forces were at work.
The S&P 500 as well as these sector ETFs still need to repair this damage as none have made new highs. However, not all sector ETFs are the same.
Simple relative strength studies can quickly show which sector ETFs are performing better or worse than others, which can be very helpful in the context of managing a portfolio. For example, the relative strength chart of Consumer Discretionary Select Sector SPDR Fund (XLY) has again broken out to all-time highs, making it the only sector ETF in this report to do so. On the other hand the Materials Select Sector SPDR Fund (XLB) has violated a pivot low made in April 2013.
These divergences are evident in the table below. From a broad market perspective, continue to monitor how the S&P 500 behaves around next support (1534-1540) as a potential head and shoulders top could be forming.
Technology Select Sector SPDR Fund (XLK) – The relative strength breakout from the 2012 downtrend line still suggests intermediate to longer-term leadership as long as XLK remains above its April 2013 low. Violation of this support, again relatively speaking, would negate this call. The price chart still needs to repair damages made by the heavy selling over the last couple of weeks. Initial resistance remains the top of the 6/20/13 downside gap at 31.53.
Financial Select Sector SPDR Fund (XLF) – XLF managed to hold onto initial support near the bottom of the 5/3/13 upside gap (18.68) and bounce back to close the 6/20/13 downside gap. This is a good sign that the selling is abating. The ability to close this gap allows for initial resistance to move back to the May 2013 high (20.35). In the meantime, it appears that a trading range is unfolding between these two levels.
Health Care Select Sector SPDR Fund (XLV) – There are a couple of things going on that need to be monitored. The first is the potential head and shoulders top pattern that looks to have been developing over the past 3 months. Neckline support appears to be in the 46-47 range. The other is on the relative strength chart as XLV has held up fairly well and could be on the verge of a breakout as it is pushing up against overhead resistance.
Consumer Discretionary Select Sector SPDR Fund (XLY) – From a relative strength perspective, XLY is the only sector ETF that has broken out to all-time highs. This in its own right is a constructive sign for the market as it is evident that investors are not fleeing to the safety of more defensive sector ETFs. The flip side to this call is that XLY continues to trade below its 6/20/13 downside gap. Repeated failures warns of a test of the June 2013 low (53.96).
Energy Select Sector SPDR Fund (XLE) – XLE briefly violated its 2012 uptrend line before bounces back. It would take a weekly close below this line to suggest a sustainable change in trend was taking place. Despite the 9.5% May-June 2013 decline, XLE still maintains rising 10/30-week moving averages. However, the 6/20/13 downside gap needs to be close above 80.69 in order to show investors that some of the damage was being repaired.
Consumer Staples Select Sector SPDR Fund (XLP) – XLP has bounced off of support in the upper-30s, which corresponds to the June 2013 low and the 150-day / 30-week moving averages. However, in the process of the May-Jun 2013 decline, there has been technical damage, such as the 5/31/13 negative outside week pattern, the rolling over of the 50-day / 10-week moving averages and a series of lower low/highs. This warrants a cautious outlook.
Industrial Select Sector SPDR Fund (XLI) – The bullish call is based upon two large symmetrical triangle breakouts earlier this year and an intermediate to longer-term trend that remains favorable. The bearish camp could be looking to the 6/21/13 negative outside week and a potential head and shoulders top as early warning signals. I prefer to follow the dominant trend, but will be ready to switch gears on a confirmed violation of neckline support near 40.
Materials Select Sector SPDR Fund (XLB) – In hindsight a 5/24/13 negative outside week pattern might form a head of a potential head and shoulders top patter that looks to be developing. A 6/20/13 downside gap and another negative outside week during 6/21/13 are alluding to a test of neckline support near 37.10. The ability to maintain support could be help form the right shoulder. From a relative strength perspective, XLB continues to breakdown last week.
Utilities Select Sector SPDR Fund (XLU) – As various other sector ETFs look to be in the midst of some kind of distribution patterns. XLU has already broken down from one in May 2013. It now appears that a healthy bottoming process is underway, although some more work needs to be done. For example, a move above the June 2013 high (38.45) snaps a string of lower highs on the daily chart and strengthens its June 2013 low as initial support.
iShares Dow Jones US Telecom Index (IYZ) – IYZ has closed its 6/20/13 downside gap, which helps to stabilize the selling pressure. However, what appears to be the thorn in its side is overhead supply near 27.50-27.60 or the June 2008 reaction high and the recent May 2013 high. From a relative strength perspective, IYZ is still in the process of recoverying from its April-June 2013 underperformance. A move above its April 2013 downtrend line helps this process.
J. Beck Investments is an independent provider of technical research for ETFs.