We're mid-way through the third quarter of 2009, and the major averages have reached more significant resistance, so it seems appropriate to take a look at the major sectors. Since our last sector analysis on May 15th, the S&P 500 has risen from 882.50 to 1010.50, and many of the major sectors have done even better.

Figure 1 - Click to Enlarge

In March and May, the primary reason for my positive view was the clear bullish divergences that appeared on the weekly charts of the major averages as well as the charts of the market internals. The weekly S&P 500 chart is a good example as the RSI made a low of 16 in early October (point 1), but was much higher in early March (point 2) despite the S&P being substantially lower. The two-year downtrend in the RSI (line a) was broken the week ending March 27th, which confirmed the positive divergence. The RSI has continued to make new highs, which is positive. The price chart shows that the 38.2% resistance level has been reached, with the 50% level at 1120. Good support in the 920-950 area should hold on any correction. From the weekly analysis, there are no signs yet of an intermediate top.

Table 1 - Click to Enlarge

The sectors I liked best from the May report were the Materials and Consumer Discretionary, as I had already identified the Information Technology sector as a favorite the prior month.  I was unfortunately not convinced that the Financials sector had bottomed, and therefore missed the dramatic rally. Only the Materials and Information Technology sectors are showing nice gains for 2009 and they remain two of my favorite areas. I had been closely monitoring the triple bottom in the RS chart of the Consumer Discretionary sector, and its completion was noted in the daily report on March 27th. The completion of the major reverse head-and-shoulders bottom formation in the Industrials makes it—and the Financials sector—ones to watch. The remaining sectors are neutral to negative, but we will examine them further also.

Figure 2 - Click to Enlarge

The RSI for the Materials sector also formed a five-month positive divergence at the March lows (line b), though the long-term downtrend in the RSI (line a) was not overcome until the latter part of April. The Materials are up 70% from the March lows and a respectable 32% for the year. The 38.2% resistance was overcome last week, with the 50% level just below 200. In May, we suggested that a pullback to the 130-140 area would be a good buying opportunity. The setback in early July just reached the 143 area before the Materials accelerated to the upside. Even though the sector is overbought, the weekly trend is still positive, and any pullbacks in the weekly RSI to the 50-55 area and the rising WMA should be a buying opportunity.

Figure 3 - Click to Enlarge

The Information Technology sector is up 59% from the March lows and is the best performer for the year, up 36%. It has gotten plenty of attention over the past few months, having reached the major 50% retracement level for the sector and for the NASDAQ. There is a band of strong resistance at 340-350, along with the 61.8% resistance, which could take several attempts to overcome. The RS chart shows that the Technology sector moved above its WMA in early 2009, then broke out above resistance at the end of February, which was featured in our March 4th daily report. This sector should continue to be a leader until there are signs that the WMA is starting to flatten out, but it currently is rising sharply.

NEXT: Industrials, Financials, and More