Strong market performance this week has set up favorable risk/reward buying opportunities in top-performing sector ETFs tracking consumer discretionary, technology, and consumer staples.

The impressive rally on Tuesday rescued the stock market from critical support, as the financial-heavy Spyder Trust (SPY) dropped below the 61.8% support on Monday, but closed well off the lows. The Dow Industrials retraced just over 50% of the prior rally while the tech-heavy PowerShares QQQ Trust (QQQ) held its 38.2% retracement support.

The Advance/Decline (A/D) lines for all of the major averages have turned up sharply, but it will be important that they keep pace with prices and confirm any upside breakouts. The McClellan Oscillator has turned up from oversold levels, and at -42, it is well below overbought territory.

The decline into the June lows and the rally into the early-July highs have caused some significant changes in the relative performance, or RS analysis, for the major sectors. Since mid-April, my sector analysis has favored consumer staples and health care as the “new star performers.” 

Though these two sectors still look positive technically, they are not currently leading the market higher like they did going into the May highs. In June, I added the Select Sector SPDR – Utilities (XLU) to my favored list as well. (See “The Best Sectors for Summer.”)

Last month, I also added the Select Sector SPDR – Consumer Discretionary (XLY), which alongside the Select Sector SPDR – Technology (XLK) makes up the leading sector ETFs.

Click to Enlarge

Chart Analysis: The Select Sector SPDR – Consumer Discretionary (XLY) moved through its downtrend, line a, in late June, rallying to a high of $41.78. XLY held the 50% support level on Monday with a low of $39.63.

  • There is next resistance at $41 with the 127.2% retracement target at $42.30
  • The daily relative performance, or RS line, moved through resistance, line b, in June, confirming that the fund was outperforming the S&P 500. It also shows a strong uptrend, line c
  • The on-balance volume (OBV) confirmed the July high and has now turned up from its rising weighted moving average (WMA)
  • The weekly OBV (not shown) is positive and also made new highs in July

The rally in the Select Sector SPDR – Technology (XLK) from the June lows was impressive, as the fund gained 9.5% versus a 7.5% gain for the Spyder Trust (SPY). Though the difference may not seem too dramatic, XLK outperformed SPY by 2% in just nine days.

  • XLK held the 50% support at $25.54 on Monday and has stronger support in the $25 area
  • The RS line moved through its downtrend (line f) on July 6 and shows a strong uptrend on the daily chart, line g
  • Weekly RS (not shown) is rising sharply but has not yet broken its downtrend
  • The daily OBV retested its breakout level, line h, and has now turned higher
  • The daily chart shows strong resistance, line d, in the $26.88-$27 area. A close above this resistance will complete the trading range (lines d and e) with upside targets at $29.50-$30

NEXT: See Latest Price Action for Health Care and Consumer Staples

Tickers Mentioned: Tickers: XLP, XLK, XLV, XLY, XLU