Last week, the Consumer Discretionary/Cyclicals SPDR posted a new Intermediate-Term Trend Model (ITTM) BUY signal. Today, the Financial SPDR (XLF) joined in with its own ITTM BUY signal. In the long term, we can see that the only sectors with Long-Term Trend Model (LTTM) BUY signals are the defensive groups. It's certainly positive to see other sectors beginning to participate.
Why is it positive to see those two sectors posting ITTM BUY signals? Notice how, in the sector rotation model below, we already were seeing strength in Healthcare, Consumer Staples and Utilities (looking at the graphic, "Early Contraction" is the point where things start to go south in the market). Real Estate used to be included in Financial Services, so it lines up between Utilities and the Financials. I like that the two areas that have come back online with ITTM BUY signals are the next sectors in rotation, meaning that we are moving in between early and late contraction. The question is whether those ITTM signals will stand up to what will likely be another leg down.
Let's look at the new signal on XLF. The 20-EMA just passed the 50-EMA. That triggers the ITTM BUY signal. However, there are a few obstacles that need to be overcome before I would say that this is a healthy sector. First, the 50-EMA is below the 200-EMA, suggesting that XLF is in a bear market configuration. Next, price has reached some serious resistance. This area of resistance was the bottom of a trading channel in mid-2018. In addition to bumping against resistance around $25, the 200-EMA is also lined up just above price. The PMO is beginning to decelerate. I will need confirmation of this BUY signal with a break above resistance.
Intermediate-term resistance on XLY lines up with lows in June/July, as well as at the bottom of the gap at beginning of December. Like XLF, the PMO is beginning to decelerate. The good news is that price is holding above the 200-EMA. If it can continue to do so, a 50/200-EMA positive crossover can occur, which would give XLY a long-term buy signal.
Conclusion: While it is encouraging that we are seeing less defensive sectors beginning to flip IT bullish, both XLF and XLY still have some work to do to confirm these new ITTM signals... mainly with a breakout above current resistance levels.
Watch the latest episode of DecisionPoint with Carl & Erin Swenlin LIVE on Fridays 4:30p EST or on the StockCharts TV YouTube channel here!
Technical Analysis is a windsock, not a crystal ball.
Happy Charting!
- Erin
Helpful DecisionPoint Links:
DecisionPoint Shared ChartList and DecisionPoint Chart Gallery
Price Momentum Oscillator (PMO)
Swenlin Trading Oscillators (STO-B and STO-V)
**Don't miss DecisionPoint Commentary! Add your email below to be notified of new updates"**
