How To Identify Sector ETFs Before They Make Big Moves

How To Identify Sector ETFs Before They Make Big Moves

For most traders the best gains come from combining the weekly and daily relative performance analysis.

This approach often allows one to be buying sector ETFs before they get the market's attention or are mentioned in the popular financial media.

Here's a great example:

In the fall of 2014, Barron's Big Money poll revealed that only 1% favored the utility sector and it was by far the lowest ranked sector for new purchases.

The weekly chart of the Utility Sector Select (XLU) shows that after peaking in July 2014 it had subsequently formed lower highs: line a (click to enlarge)

How To Identify ETFs about to make big moves

The weekly relative performance (RS) was also in a downtrend, line b, as it peaked in the spring and diverged from prices as XLU was making its July highs. This type of divergence informs the trader that it is time to take profits. On October 3rd (line 1) the RS line moved above its WMA and two weeks later XLU overcame the weekly resistance at line a.

This signal was preceded two days earlier by a move in the daily RS line above its WMA. From the October 3rd close at $41.46, XLU rallied to a high on November 11th of $45.42.

This was a move of 9.5% in just twenty-three days. This was not bad for a staid utility ETF that the Wall Street pros were not recommending to their clients.

The XLU traded in a range for the next four weeks as the daily RS formed a downtrend, line e. This resistance was overcome on December 9, 2014 as the RS line had started to form a new uptrend, line f. The XLU declined the next week and it dropped below its 20 day EMA before turning higher. This provided a favorable entry point.

On December 18th XLU closed at $46.00 as it overcame the resistance at line d. Just six days later XLU had rallied to $48.29 which was 6.6% above the close on December 9th. The test of the daily starc+ band indicated that XLU was now a high risk buy.

On January 28th XLU made a new rally high at $48.95 before closing lower on the day. On February just four days after the high (line 4) the RS line dropped below its WMA suggesting that XLU was weakening versus the S&P 500. Just three days later the weekly RS dropped below its WMA and the uptrend, line c. This was further confirmation that XLU was no longer a market leader. From the January high XLU dropped 13.6% into the March 11th low and after a brief rally declined even more.

The best trading opportunities develop when the daily RS analysis is positive and the weekly has already bottomed as was the case for XLU in December 2014. There are also good short term trading opportunities when the daily analysis turns positive but the weekly studies are just in the process of bottoming. The initial rally, as signaled by the positive daily studies, is often enough to turn the weekly indicators positive.

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