Sectors Likely To Make New Highs

It was the third negative month in a row for the market averages and the SPDR Sector ETFs also had a rough week. Only the Utilities Sector (XLU
XLU
) had a meaningful gain of 1.3%. The Technology Sector (XLK
XLK
) was up 0.05% but the other nine sectors were lower.

Leading on the downside was Energy Select as it was down 5.8% followed by a 5.5% decline by the Consumer Discretionary Sector (XLY
XLY
). A majority of the other Sector ETFs were down 2-3% which confirms that the selling in October was widespread. It is the first consecutive three-month decline since March 2020 as the S&P 500 had its Covid correction low that month.

The updated table as of the October close reveals that only four SPDR sector ETFs closed the month above their Yearly pivot so let’s look at the monthly charts and technical studies. Many other ETFs are not far below the yearly pivots which also acts as resistance. A move above these pivots in November may be significant.

The Technology Sector (XLK) made a high of $181.07 in July as the prior high at $174.19, line a, was decisively overcome. The October low was $159.50 and was a decline of 11.9% from the July high. This low was just below the yearly R1 at $160.57 which became support after it was overcome in May. The 20-month EMA stands at $153.42 with the yearly pivot at $136.25.

As I have mentioned in past observations, the longer-term time frame analysis often clarifies the technical outlook as it smooths out the noise from the daily data. The monthly relative performance RS moved back above its EMA in January as it closed the month above the yearly pivot. It has stayed positive and even made a new high, line c, as XLK was correcting. The on-balance-volume (OBV) also crossed above its WMA in January and shows a long-term positive trend, line e. Once above the July high, the R2 at $197.47 is a reasonable target.

The Communication Services (XLC
XLC
) was down 1.3% in October after testing the yearly R1 for the past four months. This was a sign of strength amongst the positive acting sector ETF. From the July high of $69.05 to the October low of $62.82 that was a decline of 9%. The rising 20-month EMA at $62.06 was not reached. On a strong close above $69.05, there should be a test of the 2021 high of $84.64.

The monthly RS is holding above its gradually rising EMA after it turned positive in May at $61.98. The OBV has dropped sharply from its high and is back to its EMA as the volume was heavy in October. The OBV had previously broken out to the upside in April as the resistance at line b, was surpassed. The impressive new OBV high does suggest strong accumulation.

The Energy Select (XLE
XLE
) had an October low of $84.09 but is holding above its rising 20-month EMA at $79.11 with the weekly uptrend, line b, and the yearly pivot at $76.91. The flag formation, lines a and b, does look to be a continuation pattern or a pause in the uptrend from the 2020 lows. The completion of this formation has targets at $106 and then at $115. The yearly R1 is at $100.26 and then the R2 at $115.53.

The monthly RS is holding above its rising EMA but has formed lower highs (see arrow). It has not made a new high with prices and this will be a negative if the RS drops back below its EMA. The OBV has continued to make higher highs since it turned positive in January 2021 with XLE at $35.

The Industrial Select (XLI
XLI
) broke out of its trading range, lines a and b, in June 2023 and reached a high of $110.67 in July. The decline from this high dropped XLI to a low of $96.11 in October which was a drop of 13.2%. The low was close to the yearly pivot at $94.38. The October close was just below the flat 20-month EMA at $98.80. For November, there is initial resistance at $103.92 which was the October high, and then at $107.40 the yearly R1.

The weekly RS closed the month below its WMA but was above the support at line c. This makes the performance in November more important as a move in the RS back above its EMA would be a bullish setup. The OBV also closed below its EMA and the support at line d. This is also not a positive sign as further weakness could have implications on the overall market.

The stock market action early in the month will be important as it has one of the more bullish trends on a seasonal basis. I will have more on the current market update after the Friday close. It will include the new monthly pivot levels.