The weak opening Wednesday was a sign that the market rally had already fizzled, as many of the major averages are now approaching or testing the December lows. There is longer term support from early November, which, for the Spyder Trust (SPY), is just 1.4% below current levels.
The small-caps and Dow Transports were two of the weakest indices, along with the KBW Bank Index, all down 1.205-1.30%. The homebuilders did a bit better as the iShares US Home Construction ETF (ITB) was down just 0.45%. Of course, it is the weekly close for this industry group that will be important from a technical standpoint.
The market decline has started to reduce the too high bullish sentiment, which I felt was needed before the market could start a sustainable new rally. According to AAII, the % of bullish investors dropped to just over 32% this week, down from the 55% just after Christmas. There are no signs yet of a bottom, but a better 1-3 day bounce is likely in the next week. It could come from lower levels.
All of the sectors have been hit, and some of the best 2013 performers, like the Select SPDR Consumer Discretionary (XLY), have been hit especially hard. A look at the key support levels for these four market leading sectors will help investors target new buy levels once there are signs that the correction is ending.
Chart Analysis: The Select SPDR Health Care (XLV) has been a star performer since in broke through 12-year resistance in 2012.
- So far XLV is down 3.6% from its all-time January high of $57.50.
- The daily chart shows that the daily starc- band is being tested, with the weekly now at $53.52.
- This is very close to the quarterly pivot of $53.58 and the 38.2% Fibonacci retracement support from last June's lows. In November, XLV had a low of $52.39.
- The daily relative performance broke through its resistance, line c, in early 2014, as it has been stronger than the S&P 500.
- The weekly RS analysis (not shown) shows a similar upside breakout.
- The daily on-balance volume (OBV) did not confirm the 2014 highs, as it formed a negative divergence, line d.
- The OBV has now broken support at line e, indicating the decline can still go further.
- The weekly OBV (not shown) did not form any divergences at the highs.
- There is initial resistance now in the $56-$57 area, along with the 20-day EMA.
The Select SPDR Consumer Discretionary (XLY) was up over 42% in 2013, but it is down 6.2% from the high at the end of 2013.
- It looks as though XLY will close this week below the quarterly pivot of $64.04 (see circle), as it closed Wednesday at $62.67 and right on the weekly starc- band.
- For next week, the band is at $62.18 with the quarterly S1 support at $61.24.
- The relative performance peaked in the first half of December and formed a negative divergence (line g) at the highs.
- The RS line has dropped below its WMA, but is still above the longer term uptrend, line h.
- The daily RS analysis (not shown) completed its top on January 8.
- The weekly OBV did confirm the new highs (line i), but has subsequently broken below its WMA and the uptrend, line j.
- The monthly technical studies did confirm the new highs.
- There is monthly pivot and chart resistance in the $65-$66 area.
Click to Enlarge
The Select SPDR Financials (XLF) was up 35.5% in 2013 and hit a high of $22.16 on January 16. It is now down 5.2% from this high and is just slightly below its quarterly pivot at $21.07.
- This makes the close this week in XLF one to watch closely.
- The weekly starc- band and uptrend, line a, are in the $20.60 area.
- There is more important support in the $19.35 area, line b.
- The weekly relative performance peaked in July and has since former lower highs, line c.
- The RS line is still holding above the more important support at line d.
- The weekly OBV has formed higher highs, line e, which confirmed the price action. The WMA has now been broken, with more important support at line f.
- The weekly volume at the highs (see circle) was low.
- The monthly pivot at $21.58 now represents first strong resistance.
The Select SPDR Industrials (XLI) is an important sector to watch when you are expecting the economy to get even stronger in 2014. The ETF was up 40.5% in 2013, but traded in a tight range in the four weeks prior to last week's plunge.
- From the high at $52.32, XLI has currently corrected 4.8% and is currently trading just below its quarterly pivot of $49.88.
- For next week, the starc- band is at $48.78, with the September high, line g, at $48.
- The uptrend on the weekly chart, line h, is now in the $47.47 area.
- The weekly relative performance did confirm the highs and could move back above its WMA this week.
- The RS line is well above the support at line i, after staging a strong breakout last August.
- The weekly OBV did form higher highs, line j, but is on the verge of closing the week below its WMA.
- There is longer term OBV support now at line k.
- The monthly pivot and strong resistance is now in the $51.23 area.
What it Means: This analysis reveals the key support levels in these ETFs that could be tested before the current correction is over. The Select SPDR Technology (XLK) has also been hit hard, as it is down over 6% from its highs, as Apple, Inc. (AAPL) has dragged it lower. It has tested the quarterly pivot at $34.32.
How to Profit: No new recommendations.
Portfolio Update: Still long the Select SPDR Health Care (XLV) from $38.50, with a stop at $52.77.
Also long the Select SPDR Industrials (XLI) from $45.76, with a stop at $45.23. I recommended selling 1/3 on January 18, at $52.07.
Also long the Select SPDR Technology (XLK) from $31.58, with a stop at $33.49.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.