On Monday I wrote that DIA 240 was likely to get tagged. That was quite the understatement. The Dow and broader averages over the globe got slammed Thursday and Friday. The Dow proxy, DIA, closed the week at 235.13 breaking three support levels. The next support is 232 and it’s not strong. See daily chart from November 2017.
SPDR Dow Jones Industrial Average ETF (DIA) daily
Widening our lens, the daily chart from late 2016 shows the current support levels. The only significant support level between current price and primary support is 220. The problem is that this support level is weak. If this level gets taken out price will try and get to primary support which is about 10% lower from Friday’s close.
SPDR Dow Jones Industrial Average ETF (DIA) daily2
The weekly chart from 2009 provides some perspective. Although the short term outlook remains funky the upwards trend from 2009 has not been violated.
SPDR Dow Jones Industrial Average ETF DIA) weekly
The good news is that the S&P 500 index closed above the February 8 sell off close and both DIA and SPY have weak support 1% lower from Friday’s close. The bad news is that like DIA, SPY doesn’t have much support between now and rising primary support (from 2009) which is about 12% lower. See weekly SPY chart.
SPDR’s S&P 500 Trust Series ETF (SPY) weekly
If price does get sucked down into this really important support zone it will likely be a good buying opportunity although the road to get there will be unpleasant and may take the better part of Q2.
Let’s go under the hood a little and look at the S&P 500 index sector ETF’s relative to their rising support from 2009.
SPDR’s Select Sector Financial ETF (XLF) weekly
Price is currently 28% above rising primary support.
SPDR’s Select Sector Technology ETF (XLK) weekly
Price is currently 23% above rising support.
SPDR’s Select Sector Energy ETF (XLE) monthly
Price broke primary support in February.
SPDR’s Select Sector Consumer Staples ETF (XLP) weekly
Price broke primary support last October and again in early February.
SPDR’s Select Sector Industrial ETF (XLI) weekly
Price is 12% above rising primary support.
SPDR’s Select Sector Health Care ETF (XLV) weekly
Price is 28% above rising primary support.
SPDR’s Select Sector Consumer Discretionary ETF (XLY) weekly
Price is currently 11% above rising primary support.
SPDR’s Select Sector Materials ETF (XLB) weekly
Price broke primary support in early February and again last week.
SPDR’s Select Sector Utilities ETF (XLU) weekly
Price is sitting right on top of rising primary support.
So, price action has taken out primary support in XLP (Consumer Staples), XLB (Materials) and XLE (Energy). During the “Financial Crisis” of 2008/2009 XLP, XLB and XLE were the last sectors to break down (expected cyclical rotation).
Also, during the “Financial Crisis” XLF was the first S&P 500 Index Sector to break down followed by XLV (Health Care) then XLK (Technology). Currently, XLF, XLV and XLK are the best performing sectors relative to primary support.
Fundamentally, one would think “if” the stock market has made a significant top then XLP, XLB and XLE would start getting a bid up or at least start to out perform the other sectors soon. Although all three have broken primary support XLB and XLE are sitting right on top of lower support.
“If” the stock market has made a significant top (further price deterioration) XLF, XLV and XLK will likely suffer greater mean reversion than XLP, XLB and XLE.
So, to sell or not to sell?
Not yet. Remember, stocks will always do their mean reversion act. These pullbacks are normal and healthy. The volatility is scary but typical especially considering the high returns over the past two years.
My outlook remains short term funky while the market goes through a reset for a more sustainable uptrend…and, more buying opportunities.
Trade Smart,
Don