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The Select Sector SPDR Health Care (XLV) has been a favorite sector for most of the year as it has been up every quarter and currently shows a 16.7% gain for the year. The correction in November held above the 50% retracement support.
- XLV broke through the trendline resistance in October, line a, that connects the 2010 and 2011 highs as it peaked at $41.40.
- Once above the previous high, the 127.2% Fibonacci target is at $42.25.
- The last two major weekly rallies have averaged $6.17, which when added to the November low of $38.48 gives an equality target of $44.65.
- The relative performance is positive as it tested its long-term uptrend, line c, in the middle of September and moved back above its WMA when XLV was peaking.
- The weekly on-balance volume (OBV) tested support, line d, on the correction and closed back above its WMA last week.
- There is initial support in the $39.80-$40 area and then stronger in the $39.20 area.
The bullish action of the weekly chart of the Select Sector SPDR Industrials (XLI) was discussed last Friday as it suggested that a major bottom has been completed.
- The November correction held above the 61.8% support at $35 and the downtrend, line f, was broken late last week.
- There is next strong resistance in the $38 area with the all-time highs from 2011 at $38.98.
- The daily relative performance broke its downtrend, line h, at the start of November just before the final wave of selling took XLI to its correction low.
- The RS line shows a positive pattern and is above its WMA.
- The daily OBV completed a base formation just before Thanksgiving as it broke through the resistance at line i.
- There is minor support now at $37-$37.30 and then further at $36.60
- On new position the tightest stop would be just under $35.50.
What it Means: Of the four sectors, the Select Sector SPDR Consumer Discretionary (XLY) is probably the most vulnerable to a sharp correction given the fragile nature of the consumer. The sharp drop in the preliminary consumer sentiment reading last Friday is a short-term negative.
For new positions, the Select Sector SPDR Financial (XLF) and Select Sector SPDR Industrials (XLI) look the best.
How to Profit: Those not already long XLF could go 50% long the Select Sector SPDR Financial (XLF) at $15.92 and 50% long at $15.68, with a stop at $15.29 (risk of approx. 3.2%).
For the Select Sector SPDR Industrials (XLI), go 50% long at $37.02 and 50% long at $36.73, with a stop at $35.38 (risk of approx. 4%).
For the Select Sector SPDR Health Care (XLV), go 50% long at $40.04 and 50% long at $39.76, with a stop at $38.42 (risk of approx. 3.8%).
For the Select Sector SPDR Consumer Discretionary (XLY), go 50% long at $46.88 and 50% long at $46.26, with a stop at $44.42 (risk of approx. 4.6%).
Portfolio Update: Investors should be long the Select Sector SPDR Financial (XLF) at $14.40, with a stop at $14.77.
You should also be long the Select Sector SPDR Health Care (XLV) at $36.14, with a stop at $38.42.