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3 Sectors For The Next Bull Run

|Includes: AAPL, IYT, SPDR S&P 500 Trust ETF (SPY), XLP, XLU, XLY

The stock market has started off the month of August on a relatively weak note yet so far no heavy selling has developed in the major averages despite the sharp decline in market bell weather Apple, Inc. (NASDAQ:AAPL). The multiple time frame volume analysis of AAPL still points lower as there has been no improvement since last month's review "Volume Warned of Apple's Drop".

The A/D line analysis of the NYSE Composite, S&P 500, Nasdaq 100 and Russell 2000 is still in the corrective mode so a further decline cannot be ruled out. It would take a drop below last week's lows in the major averages to trigger heavier selling.

The futures are sharply higher in early trading despite the fact that market leader Disney (NYSE:DIS) is down 8% ahead of the opening. Of course the close is what is important and would take take several days of strong A/D numbers to indicate that the market has really bottomed out.

The month end analysis of the key sectors shows that the leadership role has been taken over by the Consumer Discretionary Sector Select (NYSEARCA:XLY) as it is now up 11.2% versus just a 2.4% gain in the Spyder Trust (NYSEARCA:SPY). It started to outperform the Health Care Sector Select (NYSEARCA:XLV) last week as it is up 10.1%.

They are the only two double gainers so far this year as the XLE, XLI and XLB are the weakest. All are below their quarterly pivots . There have also been some significant changes in both the weekly and monthly technical studies for many sectors though both time frames are negative for these three underperforming ETFS.

The choppy summer trading has left many investors on the sidelines and as I noted last week (Is Bearish Sentiment High Enough?) the bullish sentiment is quite low. Based on the multiple time frame analysis at the end of July there are three sector ETFs that look attractive for new purchase while one of the year's weakest ETFs now bears close watching.

The weekly chart of the Consumer Discretionary Sector Select moved through the weekly resistance in the middle of July and it has continued to push higher.

  • The weekly starc+ band is at $82.18 with August projected pivot resistance at $83.35.
  • Both the rising 20 day EMA is at $79.01 and the monthly pivot at $78.95 are close to the breakout level (line a)
  • The daily starc- band stands at $78.25 with the rising 20 week EMA at $77.08.
  • The relative performance surged to another new high last week and is still well above its long term uptrend, line b.
  • The on-balance-volume (OBV) broke through its resistance, line c, in June . The OBV's WMA is rising strongly.
  • The daily indicators (not shown) are also positive.

The Utilities Select Sector (NYSEARCA:XLU) has been lagging the stock market all year as it is down 6.8%. XLU has total assets of $6.1 billion, a yield of 3.5% with an expense ratio of 0.15%.

  • XLU closed strong last week and above the prior seven week highs but it was down on Tuesday.
  • XLU had been below its quarterly pivot throughout the 2nd quarter.
  • On July 10th it closed above the 3rd quarter pivot at $42.61.
  • The rising 20 day EMA is now at $43.16 as the daily starc+ band was tested Monday
  • The relative performance dropped below its WMA in February one week after the highs.
  • The RS line now appears to have bottomed out as it moved above the resistance, line e, and its WMA.
  • The OBV was able to move above its resistance, line f, in July and its WMA is starting to turn up.
  • The monthly pivot resistance is at $45.09 with the weekly starc+ band at $45.81.

The Consumer Staples Sector Select (NYSEARCA:XLP) closed above its weekly resistance, line a, three weeks ago. XLP has total assets of $8.25 billion, a yield of 2.45% and an expense ratio of 0.15%.

  • The starc+ band is at $51.26 with the monthly pivot resistance at $52.28.
  • The monthly pivot is at $49.51 with the rising 20 week EMA at $48.82.
  • The downtrend in the RS line was broken at the start of July and the WMA was also overcome.
  • The relative performance has risen sharply and is now well above its WMA.
    The OBV made a marginal new high two weeks ago but its WMA is just rising slightly.
  • The daily OBV (not shown) is also lagging the price action while the relative performance is strong.

The iShares Dow Transportation ETF (BATS:IYT) has had a rough year as the airlines which were the top performers in 2014 have crashed this year. IYT has total assets of $879 million with a yield of 0.96% and an expense ratio of 0.45%.

  • IYT finally closed above the quarterly pivot at $149.84 last week for the first time since early April.
  • The monthly pivot resistance is at $153.69 with the starc+ band at $157.26.
  • The relative performance topped out early in the year but has now moved above its WMA.
  • The weekly RS line has not yet completed a bottom but the daily analysis is positive.
  • The weekly OBV is still below its declining WMA while the daily is positive.
  • The rising 20 day EMA is now at $148.63.

What to do? Given the choppy trading I would be looking for setbacks to start establishing positions in Consumer Discretionary Sector Select , Utilities Select Sector and Consumer Staples Sector Select . Any pullbacks to the rising 20 day EMAs should present a good entry point as all three are likely to be market leaders for the rest of the year.

I will be watching the iShares Dow Transportation ETF over the next several weeks to see if there are signs that it has completed a weekly bottom and is again becoming a market leader.

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