OFFENSIVE SECTORS LEAD SEPTEMBER SURGE -- XLY STILL OUTPERFORMING THE MARKET -- XLF FALLS SHORT OF RESISTANCE -- XLI FORMS LARGE RISING WEDGE -- XLK SHOWS SERIOUS RELATIVE STRENGTH THIS WEEK -- NYSE PERCENT ABOVE 200-DAY HITS RESISTANCE
OFFENSIVE SECTORS LEAD SEPTEMBER SURGE... Link for todays video. Leadership from the four key offensive sectors makes the September surge all the more impressive. Consumer discretionary, finance, technology and industrials are considered the offensive sectors. Leadership from at least 2 of the 4 is needed for a rally to have legs. Consumer discretionary represents the most economically sensitive sector (think retail). Finance represents the health of the banking system. Industrials represent the industrial base. Technology represents the appetite for risk with its high-beta stocks. PerfChart 1 shows all four sectors up more than 8% the last 12 days and outperforming the S&P 500 ($SPX) this month. These are the sectors the bulls want to see leading the market higher. Also notice that two of the three defensive sectors are up the least (utilities and consumer staples). Healthcare, the third defensive sector, is up over 7% and performing quite well this month.
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Chart 1
WEDGES AND RESISTANCE TAKING SHAPE IN KEY SECTORS... Looking at the charts representing these four, I see strong upswings in September, but resistance at or near current levels. The summer highs and key retracements combine to mark resistance. In addition, all four are overbought after the September surge. The combination of resistance and short-term overbought conditions could give way to a pullback or consolidation in the near term. It would be quite bullish if ALL four broke above their respective resistance zones. Lets look at these charts individually.
Chart 2 shows the Consumer Discretionary SPDR (XLY) hitting resistance around 32.5-33 from the 50-62% retracement zone and summer highs. The price relative is still rising, which means XLY has been outperforming the S&P 500 ETF since mid July. Mondays gap marks the first support zone to watch. The August lows mark long-term support.
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Chart 2
XLF FALLS SHORT ON RESISTANCE CHALLENGE... Chart 3 shows the Finance SPDR (XLF) staving off a support break and surging back above 14.50 this month. The ETF remains just shy of resistance and is still underperforming the broader market. XLF needs to break the August highs to reverse the downtrend. The price relative needs to break above red trendline to start showing some relative strength.
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Chart 3
XLI FORMS LARGE RISING WEDGE... Chart 4 shows the Industrials SPDR (XLI) hitting resistance from its summer highs and the 62% retracement mark. The trend since the July low is up, but it looks like one big wedge with lots of resistance just ahead.
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Chart 4
XLK SHOWS SERIOUS RELATIVE STRENGTH THIS WEEK... Chart 5 shows the Technology ETF (XLK) with the biggest sector move this month (+8.7% in 12 days). Notice that price relative (XLK:SPY) ratio moving straight up the last five days. While relative strength in technology is a positive overall, XLK is near resistance and short-term overbought. This condition could give way to a pullback towards Mondays gap.
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Chart 5
NYSE PERCENT ABOVE 200-DAY HITS RESISTANCE... The percentage of Nasdaq and NYSE stocks above their 200-day moving average remains above 50%, but these indicators are trading at levels that marked resistance in the summer. Chart 6 shows the NYSE %Above 200MA ($NYA200R) moving back above 50% with the September rally. As you can see from the chart, this indicator has been fluctuating around the 50% level since May with at least 10 crosses. The glass becomes half full (bullish) when above the 50% line and half empty (bearish) when below the 50% line. These fluctuations jibe with the price action in the underlying index, which has also been range bound since mid May. While the bulls clearly have the edge because the indicator is above 50% and rising, the 60-65% range represents the moment of truth. A break above 65% would further the bullish cause. A sharp down turn from here and a move back below 50% would put the bears back in the drivers seat. Chartists looking for a faster breadth indicator can turn to the NYSE %Above 50MA ($NYA50R).
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Chart 6
Chart 7 shows the Nasdaq 100 %Above 200MA ($NDXA200R) meeting resistance in the 55-60% area for the third time since early June. Like the NYSE indicator, this Nasdaq 100 indicator has been range bound since mid May. As long as this indicator is rising and above 50%, it favors the bulls and further strength in the Nasdaq 100. A reversal and break below 50% would give the bears the edge. I chose to use the Nasdaq 100 instead of the Nasdaq %Above 200MA ($NAA200R) because the latter has been below 50% since early June and remains in bear mode. The Nasdaq 100 represents the crme of the Nasdaq crop. Relative weakness in Nasdaq breadth reflects a selective market looking for more quality and less speculation.
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Chart 7
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Chart 8
OIL AND GASOLINE ETFS FAIL AT BROKEN SUPPORT... The USO Oil Fund (USO) broke above resistance with a surge on Friday-Monday, but failed to hold this breakout and moved sharply lower the last four days. Weakness in oil is surprising because oil and stocks have been positively correlated throughout 2010. The S&P 500 is up some 8% this month, but the USO Oil Fund (USO) is barely in positive territory and showing relative weakness. Chart 9 shows USO surging above 34 on Monday and meeting resistance near broken support (July lows and trendline break). The 3-4 week pattern looks like a rising flag and the ETF is on the verge of breaking the lower trendline. Chart 10 shows the US Gasoline Fund (UGA) with a similar pattern.
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Chart 9
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Chart 10
XLE AND OIH CONSOLIDATE AT RESISTANCE... Stock market performance and the price of oil will no doubt affect the Energy SPDR (XLE) and the Oil Service HOLDRS (OIH). Both moved higher with the stock market this month, but both are underperforming the S&P 500 ETF so far in September. Chart 11 shows XLE breaking out with the rest of the market in early September. Despite initial strength, the ETF fell short of a resistance challenge and formed a small falling flag the last five days. The indicator window shows the price relative forming a lower high in September and moving below its August low this week. The XLE:SPY ratio confirms relative weakness in the energy sector. Chart 12 shows the Oil Service HOLDRS working its way higher since June. After a gap up on Monday, the ETF met resistance near the early August high and fell back the last few days. A break above 110 is needed to resume the rally.
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Chart 11
