FINANCE SECTOR BACK TO PROMINENCE - XLF HOLDS ITS BREAKOUTS - BULLISH% FOR XLK STAYS STRONG - MARKING SUPPORTS FOR XLY - XLK STALLS FOR 3 WEEKS - BULLISH% FOR XLK IS OVERBOUGHT - RANKING BULLISH% INDICES - REVISITING ELLIOTT WAVE

FINANCIALS GAIN SOME WEIGHT... Link for todays video. After more than doubling since March, the Financials SPDR (XLF) is now the second biggest sector in the S&P 500. This was surely not the case in March when XLF was trading around 6. The finance was already an important sector, but its importance counts even more towards S&P 500 performance now. The table below shows the S&P 500 sectors with market capitalization and the percentage weight. Data comes directly from the Standard and Poors website. Information Technology remains the biggest sector by far with over 18% of the index. Energy is in third place and consumer staples are in fourth, which means the bulls still have their work cut out. It would be a real show of strength if the consumer discretionary overtakes the consumer staples sector.

Chart 1

XLF REMAINS STRONG... Chart 2 shows XLF with a series of breakouts over the last five weeks. Most recently, XLF broke above its May high and this breakout is holding. There is now a broken resistance zone around 12.6-13 that turns into the first support zone to watch. Chart 3 shows the XLF Bullish Percent Index ($BPFINA) surging above 85% in early August. This means 85% of stocks in XLF are on a Point&Figure buy signal. While this level may be considered overbought, it is also a testament to underlying strength. In fact, XLF is in good shape as long as the bullish percent index remains above 50%.

Chart 2

Chart 3

XLY AND XLK... In addition to the finance sector, I also watch the Consumer Discretionary SPDR (XLY) and the Technology SPDR (XLK) closely. As its name implies, the consumer discretionary sector represents discretionary spending (retail etc), which is vital to the economy. The technology sector represents the risk appetite in the market. A strong risk appetite is bullish for the stock market. Chart 4 shows XLY breaking above its May-June highs. Broken resistance around 24.5 turns into the first support level to watch on a pullback. The bottom indicator shows the price relative (XLY:$SPX ratio) falling short of its late April high. With this lower high, XLY is actually lagging the S&P 500 a bit. The price relative is still trending up since early July, but a break below the August low would be short-term negative.

Chart 4

TECH SECTOR STALLS... Chart 5 shows the Technology SPDR (XLK) with a nine day surge in July and then a 15-day consolidation. XLK broke resistance by surging above 19.5 on July 23rd, but the ETF has little to show over the last three weeks. Two weeks up and three weeks flat. For now, consolidation support over the last three weeks is holding. A break below 19.3 would be short-term bearish and argue for a pullback. I am also concerned with the decline in the price relative over the last three weeks. While the S&P 500 continued higher, XLK traded flat and this amounts to relative weakness. However, I would still wait for a break below consolidation support before expecting a pullback. Flat trading after an advance could be just a rest. A support break is needed to show absolute weakness.

Chart 5

XLY AND XLK BULLISH PERCENTS STRONG... Chart 6 shows the Consumer Discretionary Bullish Percent ($BPDISC) above 80%, while chart 7 shows the Technology Bullish Percent ($BPTECH) above 90%. These are nosebleed levels that should be considered overbought. However, as we have seen since April, indicators can become overbought and remain overbought. Notice that the bullish percents both crossed above 50% in late March. XLY bullish percent dipped to the low 50s in July, but never actually crossed the bearish threshold. XLK bullish percent never even broke below 70%. Talk about strong. For those with an itchy trigger finger, I overlaid the 10-day EMAs for the bullish percent indices (blue line). Both are overbought AND strong as long as they hold above their 10-day EMAs (i.e. rise). A break below these 10-day EMAs would be the first sign of short-term weakness. As far as the medium-term trend is concerned, both need to break below 50% to trigger bearish signals.

Chart 6

Chart 7

BROAD BULLISH PERCENTS... We can easily keep an eye on the bullish percent indices for signs of a medium-term trend reversal. The table below comes from the bottom of the Market Summary page. The major indices are at the top, followed by the sectors. The telecom sector has only nine stocks so I usually ignore this sector (personal preference). As you can see, the bullish percent is above 70% for all the major indices. No sign of weakness here. Of the nine sectors (10 less telecom), six are at 79% or greater. That is a sign of broad strength. Two sectors are in the low 70s and energy is around 59%. Using bullish percent to measure relative strength, energy is by far the weakest of the sectors. Of the major indices, the Nasdaq 100 and S&P 100 are the strongest (large-cap and large-caps technology). A medium-term trend change is unlikely until some of these move below the 50% threshold.

Chart 8

ELLIOTT WAVE REVISITED ... As usual, the Elliott Wave analysis garnered a large amount of feedback. We read and appreciate all feedback, but we are unable to make individual responses. Instead, responses are sent through the commentaries. With regards to the Elliott Wave analysis, I would like to expand and clarify a few items. Chart 9 and 10 show the Bull and Bear Counts again. First, both wave counts employed a 5-day EMA to smooth the data series for a longer timeframe (2+ years). Second, both wave counts assume the S&P 500 peaked in October 2007, which is where my wave counts start. In both cases, Wave 1 down extends from the October 2007 peak to the March 2008 low. Again, this chart/count is based on a 5-day EMA to smooth the data. Third, the Wave 1 advance from March to June (2009) was around 275 points, which is lower than originally reported (math error!). With Wave 3 not being shorter than Waves 1 and 5, this Bull Count suggests a Wave 3 rally to at least 1150. Fourth, the advance from March to June was either an impulse wave (1) or a corrective wave (A). Corrective waves are 2,4 and ABC. Impulse waves are 1,3 and 5. And finally, even if the bear count is correct, Wave 4 could conceivable reach 1145 as a 62% retracement of Wave 3. How about them apples! It is complicated analysis, but Elliott provided a structural framework from which to base projections. Keep that feedback coming!

Chart 9

Chart 10