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Profiting From Multiple Time Frame Sector Analysis

|Includes: XLI, XLK, Health Care Select Sect SPDR ETF (XLV), XLY, XRT

As October draws to a close, there is continued debate as to what sectors offer the best potential for the rest of the year and for 2014. It is important to look at each of the sectors from a monthly, weekly, and daily perspective in order to get a clear outlook whether you are a trader or investor.

The monthly charts, as I have discussed in a previous Trading Lesson, can be very helpful in determining the major trends. They are also very useful in identifying key levels of support as breakouts of the monthly ranges are often quite significant.

In December 2012's Sector Stages 12-Year Breakout, I noted that the trading range in the S&P 500 Health Care Sector, that went back to 2000, had been resolved in 2012. It has been one of the best performers since March 2012 as it is up 46%.

It is also important to look at both the weekly and daily analysis of the sectors. Often the negative readings from the daily analysis will allow one to spot good entry points when the weekly studies are positive.

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First, let's look at the quarter by quarter performance for 2013, as well as how the Select Sector ETFs are doing so far in the 4th quarter. Two of my favorite ETFs as we started 2013, the Select Sector SPDR Health Care (XLV) and the Select Sector SPDR Consumer Discretionary (XLY) are the top gainers in 2013.

They are up 32.8% and 33.3%, respectively, and both show solid gains for the month of October. The Select Sector SPDR Health Care (XLV) registered the best quarterly gain as it was up 15.4% in the first quarter.

One of the 3rd quarter's weakest performers, the Select Sector SPDR Consumer Staples (XLP) has done the best in October as it shows a gain of 7.5% through October 30. The Select Sector SPDR Materials (XLB) was lagging the S&P 500 in the first half of the year, with its small gain of just 2.1%, but rebounded nicely in the 3rd quarter as it was up 9.5%.

It is also surprising that the Select Sector SPDR Technology (XLK) is one of the worst performers so far in 2013 as it is up just 17% so far this year. So which sectors look the best for the long term and which appear to show the best intermediate-term opportunities?

The first step in the process is to look at the monthly relative performance and on-balance volume analysis for each of the sector ETFs. There are only two, the Select Sector SPDR Health Care (XLV) and the Select Sector SPDR Consumer Discretionary (XLY), where the monthly relative performance, has made new multi-year highs in the past few months.

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The monthly chart shows that the Select Sector SPDR Health Care (XLV) has made higher highs in nine of the past ten months. The quarterly R2 resistance is at $53.20 (see table) with the monthly starc+ band for November at $55.00. The R2 resistance is at $55.18, which is just over 4% above current levels.

The monthly relative performance made new highs in July and is still holding well above its WMA and the uptrend, line b. The monthly OBV (The Best Volume Indicator) broke through year-long resistance, line c, in March 2012 and made a new high in October. It is well above both its steep uptrend (line d) and its rising WMA. The low of the past three months is now at $48.82.

The weekly analysis for XLV is clearly positive and shows no signs of topping out. The daily studies exhibit some signs of weakness as the OBV does show a negative divergence going back to the September highs while the RS line is locked in a trading range. There is first good support in the $49.50-50.20 area.

Within the healthcare sector, there are two major sub-sectors and industry groups. Some are acting stronger than the major sector while others are weaker. The DJ US Pharmaceutical & Biotechnology Index (DJUSPN) is up 36.5% for the year. That is just over 4% better than the XLV but almost 13% better than the Spyder Trust (SPY).

The weekly chart shows an upward sloping channel, lines a and b. The resistance is at 545, line a, and the weekly starc-+ band. For November, the monthly starc+ band is at 549.20, which is about 3.7% above current levels. There is good support now in the 500-520 area.

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The relative performance peaked in April 2013 and has not confirmed the new highs. It is still above its WMA and support at line c. The OBV does seem stronger as it looks ready to make a new high this week after recently testing its steep uptrend, line c. It is well above its WMA. The daily studies (not shown) have failed to confirm the recent highs.

The DJ US Health Care Providers Index (DJUSHP) peaked at 862 in September, and it is currently down 5.3% from the highs. So far in 2013, it is up 27%. Last week's close was below the lows of the past 14 weeks, which has weakened the technical outlook.

The weekly starc- band is at 782 with the 38.2% Fibonacci retracement support at 757. The 50% retracement support is at 722. The weekly relative performance did confirm the September highs but formed lower highs, line e, before breaking its support. The RS line is now testing its longer-term uptrend, line f.

The weekly OBV also confirmed the new price highs and shows no signs yet of a top as it has turned up from its WMA. The weekly OBV broke through resistance at line g early in 2013. The daily technical studies are solidly in the sell mode and have been since the first week of October with the OBV showing a series of lower highs and lower lows.

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The monthly chart of the Select Sector SPDR Consumer Discretionary (XLY) shows the close above the major monthly resistance, line a, at the end of September 2012. It has closed higher for every month in 2013 with the starc+ band for November at $65.47. The quarterly R1 resistance is at $65.04 so this is the next upside target zone.

The monthly relative performance bottomed in February 2009 and has since stayed above its rising WMA. It is also holding well above the support, line c, that connects the 2009 and 2012 lows.

The monthly OBV will make impressive new highs this month. It formed a nice bottoming formation in 2012 (see circle) and then blasted through resistance at line d in April 2013.

The weekly analysis (not shown) is also still clearly positive as the rising 20-week EMA was tested during the early October correction. The daily analysis on the XLY does show some minor divergences but it would take a drop in the OBV below the early October lows to suggest a deeper correction was underway. There is initial support now at $61.50-$62 with the quarterly pivot and more important support at $59.79.

The consumer discretionary sector includes companies in a wide range of industry groups such as automobiles, auto parts, retail, specialty retail, media, as well as hotels and restaurants. I found the best breakdown of the industry groups and the stocks that are in them on Bloomberg (here is the link).

The only liquid ETF that follows this sector is the SPDR S&P Retail (XRT). It has 98 stocks and is well diversified with the ten largest holdings making up just 11% of the ETF. The monthly chart (not shown) continues to act very strong as both the relative performance and OBV are positive and well above support.

The weekly chart of XLY shows that it has tested and held the rising 20-week EMA on three occasions since June (see arrow). It currently stands at $80.12, which is just below the quarterly pivot at $80.99. The October low was $79.11.

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The August highs were exceeded this month with a high this week at $85.04. The weekly starc+ band is at $87.75 with trendline resistance, line a, at $88.88. The monthly starc+ band is $89.97. The relative performance shows a clear pattern of higher highs but is now below its WMA. A decisive break below the RS line, below the lows going back to May (line c), will suggest it is no longer a market-leading sector.

In the past two weeks, the OBV has exceeded the highs that were made in early August. The WMA has flattened out a bit and the uptrend, line d, now represents good support. The bullish readings from the monthly and weekly OBV means the multiple time frame OBV analysis is positive.

The daily studies have not confirmed the recent highs as the OBV has failed to surpass both the August and September highs.

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The third best performing sector, so far this year, is the Select Sector SPDR Industrials (XLI) as it is up 28.3%, so far this year, and was recommended on September 16. The ETF has approached the quarterly R1 resistance at $49.02 this week. For November, the starc+ band is at $50.75 and the chart shows a nice pattern of higher low, line a, for the past 13 months.

There is minor support now at $47.50-$48 and the September highs. The quarterly pivot is at $45.66 with the rising 20-month EMA at $40.99.

The relative performance is rising solidly and is well above its WMA. The RS line is still well below the highs made in 2011. The downtrend, line b, was broken at the end of August 2013 suggesting that this could be a market-leading sector in 2014. This would be consistent with an economy that is continuing to get stronger.

The weekly analysis (not shown) is positive but the ranges are narrow this week so a doji could be formed. A close next week below this week's low could trigger a LCD sell signal. Both the weekly OBV and the RS line are clearly positive and made new highs last week This suggests that if we do see a correction, it should be well supported.

The daily studies show no signs yet of a top and this means that the first support at $47.50-$48 will hold on a pullback.

NEXT PAGE: Sectors That Tom Likes

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.