SPDR Sector Technical Review

This post offers a SPDR Sector technical review.  For each sector, key levels are provided. In addition commentary is provided to keep you on the right side of the trade.

General Market Outlook and Conditions

The market has been extremely resilient and has been absorbing bad news in stride. It has been fertile ground for the buy-the -dippers. Even today, with new trade war worries roiling the market, dipsters were again rewarded.  That said, bulls don’t have the all clear.  As you’ll see, some of the sectors have broken their uptrend lines and that means from at least a technical standpoint, they are vulnerable to more downside.  In the coming days, I expect more volatility with the possibility of fresh tariffs on the horizon.

Traders are encouraged to keep their long portfolio risk at comfortable levels and to have some protection in place. On Sunday night and Monday morning,  those with a deep long book likely saw the fear of God as we opened.  As luck would have it, the dip buyers provided a nice bail out. That may not always be the case.  Be cautious here. If we break out for a new leg higher, they’ll be plenty of time to jump aboard. The same can’t be said for an unexpected overnight rug pull.

Let’s look at the sectors.

$XLB – Materials

Materials have seen a weak bounce off the lows, compared to other sectors. Despite the recovery in intraday, price has broken below both trend and lateral support at $56. Additionally RSI and PPO indicators have turned down and have broken their uptrend lines.

From a technical perspective, the chart has a bearish bent.  If you have a bearish view of the market, this is a tight set up for a short.  One could short against $56 with a tight stop just above and target a move to $54 which is support.  You won’t get rich on this one, but it is an objective trade.

In the options market, the biggest trade of the day in the sector, one trader rolled his  3500 May 56 P into 7000 May 55 P.  Doubling his position and keeping all the chips on the table.   

$XLC – Communications

Price came all the way back from the December lows to test the prior highs near $51.50 before pulling back. Although I didn’t draw it in, it has the potential for a double top set up. Those conjectures aside, price dropped below its steep uptrend line and is back testing from below.  Any time you see a back test from below, price is vulnerable to further pullbacks. While its probably too soon to send up red flares, if price were to move below the 20ema and the daily pivot at $49.50 it should concern longs. Such a move would leave the door open to a move to test the 50ema near $48.

$XLE – Energy

Energy has had a very weak recovery, only bouncing about 50% off the lows. Price has broken trend and now sits on support near $63.50.  Price is actually at an objective place for a trade.  Bulls could take a long position against $63.50 with a stop just below.  For me, I am not so optimistic and prefer to wait for a potential breakdown below support. That would offer a lot of downside potential with minimal risk with a stop nearby.  For the chart to get technically bullish, price would need to recapture the uptrend line and lateral resistance at $68.25.

$XLF – Financials

Job 1 for bulls is to recapture the minor up trend line in dashed blue. That will immediately avert any bear concerns.  Otherwise, the daily pivot near $17.25 is the first area to hold.  The RSI and PPO indicators are showing early signs of flattening with the potential of rolling over, but all in all, I think the chart remains somewhat productive.

Although I do not have them posted here, Traders can refer to $KRE and $KBE to drill down on regional and big bank performance.  The insurers have also been strong of late.

 

$XLI – Industrials

The chart of the Industrials is one of the more concerning charts in the group. The chart has the look and feel of a giant double top. Notice too, that the most recent high was divergent, meaning price made a higher high while RSI / PPO indicators were at lower levels.  Nothing is 100% in markets, but the divergent highs, more often than not, resolve themselves bearishly.

To my eye, price needs to hold $76.50, then recapture $78.50 to get this chart headed in the right direction.  If $76.50 were to break, then I see $75 and $72.50 as the next levels of support to hold.   $BA and $CAT are large components of this index.  Keep an eye on them for clues on where $XLI is going.

 

$XLK – Technology

For me $XLK and $QQQ are linchpins of the market.  Sure the indexes can move around up and down without $XLK, but for the market to truly break, $XLK needs to break. Therefore, even if you don’t trade the sector ETF’s, it’s important to watch $XLK closely.  When we finally resolve this choppy period in the broad markets, $XLK will play a huge roll in the direction we take.

Traders have enjoyed the steep rise in the price off the December lows, but the downside is a steep rising wedge. Price is now on the wrong side of it which exposes it to downside losses.  Overbought RSI readings are starting to come down as well as with the PPO momentum indicator.  Job 1 is staying above the daily pivot at $77.50.  If price were to pull back to $75  ( key support ) i would expect dipsters to step in as it would be a low-risk place to try a fresh long.  If however, $75 were to fail, along with a move below the 50ema, then that would be your get out of dodge moment. The door would be open to a bigger move to test the 200ema.

 

$XLP – Staples

The combination of high-yield and the perception of safety has Staples flying  near all-time highs.  Although I am no “valuation man” I’m told many of these names are trading way beyond their historic valuation and even above some tech stocks on a P/E basis.  Putting all that aside, price is flirting with it’s uptrend line off the December lows.  To keep things simple and visual, price needs to hold it’s daily pivot near $57.  A move below opens the door to testing key support at $56 where the 50ema also resides.  I would get really uncomfortable if price lost the 50ema.   A move above $58 would cement the bulls firm control by reclaiming the uptrend line.

$XLU – Utilities

Not a whole lot to see here, so I will be brief.  Price has been trapped in a $2 wide trading range for 2 months.  Therefore, on a measure move basis, a move outside the trading range projects a $2 move higher or lower.  Those wanting to trade the index can alarm $59 and $57 for a heads up on a pending move.

$XLV – Healthcare

Recently, the medicare for all chatter really knocked the wind out of the sails of this index. Since then, price has bounced back. The support level at $86 would have been a great place to get long. As it stands, I’d like to see price take out the down trend resistance line near $91.50. That would be an objective place to get long looking for higher ground.  On the downside you’ve got the 200ema and daily pivot at $88.75.  If price pulled back and fell below you could shoot against the 200ema. More conservative traders could easily wait until key support broke at $86 to establish a short position.  Inside the narrowing triangle will likely be choppy trading.

$XLY – Consumer Discretionary

This is an important offensive sector that is a good proxy for gauging risk on / risk off sentiment.  As you can see, price dropped below its uptrend line with both RSI and PPO indicators backing off their recent highs.  To get this sector back on solid ground, price needs to make a move to recapture its uptrand line in the $121 / $122 area.  The key level to hold is $116 with the 50ema just below. If price loses the 50 ema, I’d expect a move to test $111.

Amazon comprises nearly 25% of this index so I tracks the stock quite closely. Watch $AMZN closely for clues to where $XLY is going in the weeks ahead.

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Notes:

The charts are and levels are provided as well-informed guidelines. That said, please be aware that exogenous events like surprise tariffs or other events can easily move price through support / resistance zones.

Also, set you stops according to your own risk tolerance. The ones I have provided are to be used only as a guide. The most important aspect of your stop is to honor them. Some trades work, some don’t. Honoring your stop will ensure your loss on a failed trade will be minimal.

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