XLB, XLI AND XLK TEST 2011 SUPPORT LEVELS -- SMH DECLINES TO MARCH LOW -- FINANCE AND BANKING ETFS MAY HOLD THE KEY -- DEFENSIVE SECTORS ARE HOLDING UP THE BEST -- XLP, XLU AND XLV CORRECT AFTER STRONG ADVANCES
XLB, XLI AND XLK TEST 2011 SUPPORT LEVELS... Link for todays video.
In addition to a number of key indices, several sector SPDRs are testing support from the March lows. These lows are important because stocks declined rather sharply from mid February to mid March. The subsequent surge off the March lows produced a reaction low to mark an important support level. A break below this low would forge a lower low, which would have bearish ramifications. This has yet to happen. For now, the bigger trends remain up and the smaller trend remains down. After a sharp decline from the May 2nd highs, most sector ETFs are oversold and ripe for at least a bounce in the coming days, if not weeks. Chart 1 shows the Industrials SPDR (XLI) declining around 8% the last seven weeks and firming at the March lows this week. This weeks volatility established short-term resistance at 36. The Commodity Channel Index (CCI) marks momentum resistance at the zero line. These are the first levels to watch.
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Chart 1
Chart 2 shows the Basic Materials SPDR (XLB) falling around 10% from its May 2nd high and testing support from the March low. The highs of the last two weeks mark short-term resistance at 38.35. Notice how CCI formed a lower high as the ETF declined the last few months. A break above this red trendline is needed to turn momentum bullish.
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Chart 2
Chart 3 shows the Technology ETF (XLK) falling around 8% from its May 2nd high and testing support from the March low. Admittedly, a big Double Top could be taking shape here. However, this pattern would not be confirmed unless XLK breaks the March low. This weeks reaction high establishes short-term resistance at the 25.20 level. CCI has resistance just above the zero line. Chart 4 shows the Semiconductor HOLDRS (SMH) testing support from the March low and 38% retracement.
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Chart 3
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Chart 4
FINANCE AND BANKING SPDRS MAY HOLD THE KEY... Relative weakness in the Finance SPDR (XLF) and the Regional Bank SPDR (KRE) preceded the May-June decline. Chart 5 shows XLF peaking in February and moving lower well ahead of the broader market (SPY). The indicator window shows the Price Relative (XLF:SPY Ratio) peaking in mid January and moving lower. This sector has been and continues to be one of the biggest drags on the broader market. Some sort of turnaround in finance is needed to give provide a boost to the overall market. XLF is at potential support, but has yet to show any signs of strong buying pressure. Support stems from broken resistance and the 62% retracement. This weeks failed surge above 15 marks short-term resistance. A breakout here would open the door to an oversold bounce towards the next resistance zone in the 15.75 area.
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Chart 5
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Chart 6
While the big banks may have European exposure to worry about, the regional banks are largely dependent on US exposure. Chart 6 shows the Regional Bank SPDR perking up this week with a break above short-term resistance. Overall, the ETF broke consolidation support with a sharp decline from April to June. Notice that KRE peaked ahead of the broader market and the KRE:SPY Ratio has been moving lower since late December. Yep, KRE has shown relative weakness all year. All hope may not be lost though. Notice that KRE firmed this week near the 50% retracement and broken resistance, which turns support. Also notice that the Price Relative turned up. Combined with the short-term breakout, KRE is one to watch closely in the coming days.
DEFENSIVE SECTORS ARE HOLDING UP THE BEST... While the May-June decline pushed many ETFs to the March lows, the three defensive sector SDPRs remain comfortably above their March lows. The Consumer Staples SPDR (XLP), Utilities SPDR (XLU) and Healthcare SPDR (XLV) held up much better than the other sectors over the last 7-8 weeks. PerfChart 7 shows year-to-date performance for the 9 sector SPDRs. Consumer staples, energy, healthcare and utilities are up comfortably for the year. The other five sectors are mixed with finance showing the most weakness (-6.91%).
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Chart 7
XLP, XLU AND XLV CORRECT AFTER STRONG ADVANCES... The next three charts feature these defensive SPDRs and their Price Relatives, which show performance relative the S&P 500 ETF (SPY). Price Relatives rise when these sectors outperform the market and fall when they underperform. The stock market favors defensive sectors as long as these Price Relatives rise, which has been the case recently. On the price charts, all three SPDRs pulled back over the last few weeks, but they remain well above their March lows. Chart 8 shows the Consumer Staples SPDR (XLP) hitting a 52-week high in mid May and then pulling back sharply in early June. XLP consolidated the last two weeks. A break below this weeks low would argue for a deeper pullback toward the next support level. A break above this weeks high may end the pullback and continue the bigger uptrend.
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Chart 8
Chart 9 shows the Utilities SPDR (XLU) surging to a 52-week high in May and pulling back the last few weeks. This pullback looks like a falling flag or channel. A break above the channel trendline and this weeks high would reverse the four week slide.
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Chart 9
Chart 10 shows the Healthcare SPDR (XLV) with a pattern similar to XLU above. The pullback here looks more like a falling wedge. At this point, the wedge has yet to stop falling, which means the short-term trend is down. Look for a break above 35.5 to signal a reversal.
