There are two approaches to trades:
- Look to catch tops and bottoms to trade major reversals, or
- the more consistent way of identifying a valid trend, sometimes across timeframes, and going with the flow. Trade with the current and ride the wave of sentiment and institutional trading.
Trading isn’t easy. But trading WITH the market or a sector, whether it’s rising or falling, and not fighting the current, is certainly less difficult.
Below are Sector Performance charts for the past week and month. Of note are:
- the tech sector (XLK) is the only one showing strength across both time-spans.
- there was little absolute weakness last week (only relative weakness vs the other sectors). So we continue to focus on the rolling month with materials (XLB) and transports (IYT) offering bearish plays.
Real estate continues its tear. It’s again the leader of the 13 sectors shown for the week just ended..
For the rolling month (last 4-5 weeks), we see this:
- Above the five-percent growth mark is the clear leader, technology (XLK), followed by consumer discretionary products (XLY) and healthcare (XLV).
- In the second tier (under five percent) are retail (XRT), communications (XLC) and real estate (XLRE).
Our other analysis piece is our summary screen showing (1) the state of the sectors with their 20-, 50- and 200-day SMAs; (2) how stretched they are as expressed by their standard Bollinger Bands and their stochastic readings showing overbought/oversold conditions; and (3) for context, how they are sitting in relation to their rolling year performance as expressed by their 52-week channels.
Looking at the above, our observations are:
- The moving averages confirm our thoughts about the strength of XLK, XLV and XLY, along with XLC.
- Real estate (XLRE), while not as strong as the other sectors, still managed to eke out another all-time high, and now sits at the top of its 52-week channel, as is XLY. So to follow the trend, look for pullbacks into demand zones below in order to get onboard the uptrend when it resumes (The other approach, which is the opposite of our the trend-following approach, is to look for reversal candles in either the daily or lower time-frames in order to get short, as sector is sitting above its standard upper daily Bollinger Band (2.0 standard deviations)
- Materials (XLB) continued to weaken, as its 50-day SMA rolled over (the circled field above moved from neutral to bearish), so we can look for bearish plays here.
- Look for small pullbacks in XLK and tech stocks to go long or enter bullish options plays in this strong sector. For XLY and XLRE, now that both sit at 52-week highs, it’s not unreasonable to expect some profit taking. We can use these pullbacks as the basis for long plays as they reach buy zones below current price.
- On the weak side, look for rallies in XLB and materials stocks, and IYT and transportation stocks, in order to go short or enter bearish options plays. We’ll also look at the utilities (XLU), which have been weak for several weeks.
Look for setups Tuesday morning before the market opens!
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