Technology Select SPDR Ready To Break Down

06/20/08 09:24:04 AM

by Alan R. Northam

XLK made a market low in mid-January and has been trading in an upward trend ever since. However, the evidence points out that this uptrend is nothing more than a bear market rally that is about to end.

Security: XLK
Position: N/A

XLK made a major bull market top in October 2007 and has not made a higher high in almost a year. In Figure 1, note that XLK has been forming a triangle pattern made up of lower highs and higher lows. Also note that the 50-day moving average crossed below its 200-day moving average in mid-January 2008. As long as the 50-day moving average is below the 200-day moving average, the trend remains in a long-term downtrend. With this market in an established long-term downward trend, any rally is considered a countertrend move until proven otherwise. As we can see, XLK has been trading higher since mid-January in a countertrend rally. Over the last several trading days, however, XLK has broken down below its 50-day moving average on two occasions, indicating weakness and signaling that the countertrend rally could be coming to an end.

FIGURE 1: XLK, DAILY. This price chart shows moving averages and trendlines. In addition, RSI, MACD, and OBV are shown below the price chart.

Graphic provided by: StockCharts.com.

Looking at the trendlines, note that XLK moved up to and has bounced off the red downward sloping long-term trendline on two occasions in May and June, indicating that this line of resistance is holding. Since then, XLK has been trading in the downward direction and is now faced to challenge support at the intermediate-term trendline. I have included the short-term trendline on the chart. This trendline shows that the market picked up some upside momentum in mid-March until it ran into resistance at the long-term trendline. Since that time XLK has broken down below this short-term trendline, indicating that XLK is running out of upside momentum.

Looking at the relative strength index (RSI), I have shown the intermediate-term trendline and the short-term trendlines for RSI, which correlate to the intermediate-term trendline and the short -term trendline on the price chart. Note in mid-May that RSI broke down below its short-term trendline in mid-May, signaling that the increased momentum of XLK that started in March was about to come to an end. Then in early June, XLK broke down below its short-term trendline on the price chart.

Now I want to draw your attention to the red circle on the RSI chart. Note that RSI has now broken down below its intermediate-term trendline. This now signals that there exists a high probability for XLK to break down below its intermediate-term trendline on the price chart. With XLK now facing the intermediate-term trendline on the price chart, XLK could break down below it immediately.

As further evidence that XLK could be ready to break down below its intermediate-term trendline, we also noted that the moving average convergence/divergence (MACD) has just crossed below its zero line, generating a sell signal. This is an indication that XLK is ready to move lower. Confirmation of this signal will come when the MACD red signal line also crosses below its zero line.

On-balance volume (OBV) also confirms that XLK is in a downward trend and that the rally from mid-January is a countertrend rally. Note that the OBV has been in a downward trend since November 2007. This indicator is telling us that there has been insufficient volume to propel this market higher. Further, note that during the market rally from mid-January the OBV continued to move lower, indicating a lack of buying pressure to continue to move this market higher. A market needs increased volume to move it higher, but a market can fall without volume.

In conclusion, XLK is in a downward trend and the rally from mid-January is nothing more than a bear market rally. The OBV indicator shows that there is insufficient volume pressure to move this market higher, indicating that the countertrend rally will ultimately fail. The evidence of the weakening RSI and MACD indicators suggest that there is now a high probability for XLK to break down below its intermediate-term trendline and to resume its selloff immediately.

Alan R. Northam

Alan Northam lives in the Dallas, Texas area and as an electronic engineer gave him an analytical mind from which he has developed a thorough knowledge of stock market technical analysis. His abilities to analyze the future direction of the stock market has allowed him to successfully trade of his own portfolio over the last 30 years. Mr. Northam is now retired and trading the stock market full time. You can reach him at inquiry@tradersclassroom.com or by visiting his website at http://www.tradersclassroom.com. You can also follow him on Twitter @TradersClassrm.

	Garland, Tx
Website:	www.tradersclassroom.com
E-mail address:	inquiry@tradersclassroom.com

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Technology Select SPDR Ready To Break Down

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