By: Elliot Turner
In the trade through late 2009 and early 2010 we have been seeing a lot of sector rotation. Money has been moving from strong sectors to weaker sectors. Sectors make a move, digest the move while others kick into gear, and then come back into play down the road. With the market gapping up slightly to start the new week, I would like to take a moment and highlight two key market sectors at crucial inflection points.
First, let’s take a look at the Regional Bank HOLDRs (RKH). In looking at the daily chart, you can clearly see the tight range this group has traded in since early August.
For the most part, the RKH has been trading between $75 and just north of $80, with an attempted breakout between mid-September and October. In December, the index briefly broke $75, creating a short-trap that has fueled an impressive rally to start the New Year. RKH now seems poised to test its horizontal resistance in the $84-$85 range.
In order to understand the significance of this level, we need to take a step back and look at the monthly timeframe. The information obtained from the larger timeframe provides crucial context to the narrower timeframe and offers a potential target should we break out or down from here.
Drawing in the Fibonacci Lines on the monthly shows that the mid-October high of $85.43 coincides with the first important retracement level of the move–38.2%–from highs to lows. Should the RKH breakout above the $85 level, I like this long for a move up to the next major resistance area at $100–the 50% retracement area.
I will be watching this index closely as it approaches these move highs. Regional banks are a crucial indicator of the overall vitality of the larger financial industry, as well as a gauge of investor risk tolerance in the financials. A break above these levels could pull the broader markets higher as the horsemen of tech digest their massive move.
Next, let us look at the Retail Holders, RTH. The Index has been ranging between $90 and $95 for over two months now. Just last week, it broke below its uptrend line, in place since mid-August. More recently, prices were consolidating above an uptrend line and below horizontal resistance. We are now near the confluence point of the two, making the next break an important one.
On Friday, the index tested its 50-day moving average and backtested its uptrend line. When RTH breaks Friday’s range, it will be a crucial tell as to the direction of retail stocks over the coming weeks. Friday’s doji saw an influx of volume on the daily. Look for that volume to continue as confirmation for whichever way prices decide to break.
If the RKH and RTH can breakout in unison, then the market should trade higher with conviction during the coming weeks. These sectors provide an important gauge of the “real” economy and a glimpse into the health of our economy beyond Wall Street and the corporate world. We need to see improvement in the consumer sector in order to more confidently proclaim the worst behind us in this Great Recession.
