Don't Ignore This Chart

Sector SPDRs Firm with a Few Piercing Patterns

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Stocks rebounded last week and recovered part of their losses from the prior week. Long black candlesticks formed the week before Christmas and most sector SPDRs recovered with long white candlesticks the following week. A black candlestick forms when the close is below the open, while a white candlestick forms when the close is above the open. Chartists can compare the last two weekly candlesticks to find the sectors that recovered the most.

Before looking at a weekly candlestick pattern, note that the S&P 500 SPDR (SPY) is in a long-term downtrend and almost all sector SPDRs are also in long-term downtrends. 10 of the 11 sector SPDRs closed below their 40-week SMAs last week. Only the Utilities SPDR (XLU) remains above its 40-week SMA. Thus, a bullish candlestick pattern within a long-term downtrend argues for an oversold bounce (at best), not a major trend reversal.

The Financials SPDR (XLF) formed a piercing pattern because the weekly open was below the prior close and the weekly close was above the mid-point of the prior candlestick body (open-close range).  The bears were in control at the start of the week because prices initially moved lower. The bulls took over and gained control by the end of the week as prices moved higher after a weak start.

XLF also became oversold as the Commodity Channel Index (CCI) moved below -200 for the first time in over three years. The combination of a piercing pattern and oversold reading could give way to a bounce. There are broken lows in the 25 and 26 area, and a bounce back to the the 25-26 zone is possible.

Note that there were four weekly piercing patterns in the sector SPDRs last week (XLB, XLF, XLV and XLY). The other seven sector SPDRs did not manage to close above the mid-point of the prior week's candlestick. This suggests that these four sectors had the strongest bounces. StockCharts members can use the scan code below to find piercing patterns or bullish engulfings.

[symbol is 'XLK'] or [symbol is 'XLF'] or [symbol is 'XLY] or
[symbol is 'XLI'] or [symbol is 'XLC'] or [symbol is 'XLV'] or
[symbol is 'XLE'] or [symbol is 'XLB'] or [symbol is 'XLP'] or
[symbol is 'XLU'] or [symbol is 'XLRE'] or [symbol is 'SPY']

and [Weekly Close < Weekly SMA(40,Close)]
and [[Weekly Piercing Line is true] or [Weekly Bullish Engulfing is true]]


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- Arthur Hill, CMT

Senior Technical Analyst, StockCharts.com

Book: Define the Trend and Trade the Trend
Twitter: Follow @ArthurHill


Arthur Hill
About the author: , CMT, is a Senior Technical Analyst at StockCharts.com. He has written articles for numerous financial publications including Barrons and Stocks & Commodities magazine. Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed technician. In addition to his CMT designation, Arthur holds an MBA from the Cass Business School at City University in London. Learn More
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