S&P 500 Charts at a Critical Crossroads

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Will the third time be the charm? That’s the question on everybody’s mind as the S&P 500 Index launches its latest assault on the critical 1,225 level, after having failed at that level in both late August and mid-September. The index rose into breakout territory briefly on Tuesday afternoon when news hit the wires that France and Germany were nearing an agreement to strengthen the region’s rescue fund. True to form, the S&P pulled back in the final half-hour and finished exactly at the point sure to generate the maximum investor confusion: 1,225.17.


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A sustained move above this resistance line also signals a breakout from the 50% retracement from the July high to the October closing low, and it probably will open the door for the index to climb to the 200-day moving average near 1,275 — a rally of about 4%.

Given that we’re about to enter the traditionally bullish November-December period, a breakout here could well signal that the market is on track to test its 52-week high of 1,370. Conversely, the last two failures at 1,225 preceded quick 6%-plus declines, meaning there could be sizable room on the downside if the S&P experiences another shortfall at this level.

Clearly, there’s a lot on the line in the next few days. Investors should therefore keep a close eye on a number of charts that might hold the key to the market’s next move.

At Tuesday’s close, a number of exchange-traded funds with above-average sensitivity to economic sentiment were trading just short of their 50-day moving averages. If these follow the S&P and other major indices above their 50-day MAs, investors have another signal that the coast is clear to go long. On the other hand, a failure of these ETFs to confirm a breakout in the S&P could indicate that this latest rally is just another head fake.

There are three categories of ETFs that currently are trading near their 50-day moving averages:

Industrials/Energy

  • Market Vectors Coal ETF (NYSE:KOL)
  • Market Vectors Steel Index Fund (NYSE:SLX)
  • Guggenheim Shipping ETF (NYSE:SEA).

Foreign Markets

  • Rydex CurrencyShares Euro Trust (NYSE:FXE)
  • iShares MSCI Emerging Markets Index Fund (NYSE:EEM)
  • iShares MSCI Brazil Index Fund (NYSE:EWZ)
  • iShares Trust FTSE China 25 Index Fund (NYSE:FXI)

Fixed Income

  • SPDR Barclays Capital High Yield Bond ETF (NYSE:JNK)


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All of these charts are fairly close to one another, as would be expected at a time of elevated correlations, but the EEM chart does a good job of illustrating where these stand relative to their 50-days.

Notably, three important domestic sector ETFs are at critical inflection points relative to their 200-day MAs:

  • Select Sector SPDR-Consumer Staples (NYSE:XLP)
  • Select Sector SPDR-Consumer Discretionary (NYSE:XLY)
  • Select Sector SPDR-Technology (NYSE:XLK)


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According to Standard and Poor’s website, the three sectors make up 42.3% of the large-cap universe — meaning that the broader market likely will take its cue from these groups. XLP has been trading above its 200-day for six sessions, while XLK and XLY both finished Tuesday above their respective 200s after flirting with that level for about a week.

Not everybody can agree on the value of technical analysis, but there’s no denying that the 200-day has been a useful guide thus far in 2011. Recall that in mid-summer, the selloff in the equities was telegraphed when one sector after another broke below the 200-day: first industrials, followed by materials, then energy, until finally the entire market cracked.

Now, we again have the opportunity to watch how some important ETFs perform around their moving averages to get a better sense of what’s going to happen next.

As of this writing, Daniel Putnam did not own a position in any of the aforementioned stocks.


Article printed from InvestorPlace Media, https://investorplace.com/2011/10/standard-and-poor-500-charts-at-critical-crossroads-etfs-xlp-xly-xlk/.

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