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ETF Sector Rotation Has Been The Key To This Year’s Resilient Rally

April 30th, 2013

sellbuyThe broad market averages printed a solid day of gains across the board, led by the Nasdaq Composite, which set a new closing high for the year. Although volume did not confirm the move, there certainly is enough bullish momentum in leading stocksto suggest that the current rally off the lows is for real.

Rotation has been the key to this year’s resilient rally. Whenever a leading industry sector has cooled off, a new leading sector has emerged. In early 2013, financials, construction, and energy stocks pushed the S&P 500 higher. But over the past few weeks, we have seen money flow into the Nasdaq, with semiconductor stocks leading the way by breaking out to new highs ahead of the Nasdaq.

Another key to the rally has been the constructive price action of leading sectors after selling off from an extended run. Transports and financials made big runs during the first quarter, but have since been in consolidation mode, forming bullish basing patterns.

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iShares Dow Jones Transportation Average (NYSEARCA:IYT) has formed a bullish base on the weekly chart, holding support of the rising 10-week moving average (in teal):

$IYT BULLISH BASE

On the monthly chart below, note the big breakout from a 40-month long base of consolidation in the Financial Select Sector SPDR (NYSEARCA:XLF):

$XLF BREAKOUT

The weekly chart once again shows the tight sideways price action above a rising 10-week moving average at $18:

$XLF BULLISH BASE

Natural Gas ETF (NYSEARCA:UNG), which we are currently long in our model trading portfolio, has recovered nicely after a bullish shakeout below the 20-day EMA and a prior swing low:

$UNG bullish reversal candle

A shakeout is usually a bullish sign if the price action can return back above the broken support level within a few days. For $UNG, it was just a one day “undercut”, followed by a move back above the reversal candle high the following session. The low of last Friday’s reversal candle also held support of the original breakout level, which was just above $22. As such, the move off the swing high was a simple pullback to the breakout pivot.

Going into yesterday, we were stalking DB Gold Double Short ETN (NYSEARCA:DZZ) as a potential buy entry if SPDR Gold Trust (NYSEARCA:GLD) fell below the prior day’s low. That didn’t happen, as both $DZZ and $GLD formed “inside days.” Nevertheless, the $DZZ setup remains on today’s watchlist as a potential buy entry, but with a different trigger price and share size. Subscribing members should note our updated trade details in the “watchlist” section of today’s Wagner Daily newsletter.

Check out the educational trading blog, nightly swing trading newsletter, online trading course, and free stock screener available at MorpheusTrading.com, home of the best resources for ETF and stock swing traders.


NYSE:IYT, NYSE:UNG, NYSE:XLF


 

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