Building a Strong Stock Portfolio

Tickers mentioned: SPY, XHB, TOL, KBH, CRUS

Using real market examples, Tom Aspray discusses how to identify high-relative-strength stocks
to buy and manage risk by booking hard-earned profits and limiting losses.
Over the past several months, I have received a fair number of questions about the portfolio of
stocks that I have recommended. While speaking at a World MoneyShow workshop in February, I
encountered many attendees who were successfully invested, but had questions about the
methodology that I employ during the stock-selection process.
I hope this article will answer many of those questions, but I envision this as more of an ongoing
project, as I have no doubt new questions will arise.
First of all, there are too many variables that go into the determination of what percentage of
ones portfolio should be invested in stocks. I do assume the money anyone invests is not needed
for at least the next year. That said, I am a firm believer that stocks should play a major role in
most portfolios, no matter what your age.
One important factor in constructing a portfolio is determining how much is invested at any
particular time. There are some money mangers who immediately invest a new clients money in
the same stocks their other clients are invested in. I feel this is a huge mistake and is totally
contrary to my investment philosophy.
Once I have found a stock or ETF that looks attractive, the potential risk is the determining factor
in deciding whether or not I will recommend it. The potential reward plays a role, but I have found
that concentrating on the risk and minimizing it as much as possible will give the best long-term
results.
Therefore, I would never want a new reader to take all of the positions that I have previously
recommended since the risk is now much different than when those stocks were originally
recommended. As a result, I suggest that a portfolio be started with only my current
recommendations (see the current portfolio here).
This portfolio is based on $500,000, but it could be easily downsized to $250,000 or lower. The
total is important, as I try to equalize the dollar value of each position. For each stock or ETF that
is listed, the number of shares was adjusted so that the value would be approximately $10,000.
For example, if I recommend a $25 stock, then I would buy 400 shares. If it were instead a $70
stock, then I would purchase 150 shares. The maximum number of shares is 1000, which reduces
the exposure on stocks that are priced under $10.
As I will explain in more detail later, I often recommend buying 50% of a stock position at one
level and 50% at another level, so in those instances, I would be purchasing $5000 worth at the
first price level and $5000 at the second.
Figure 1

Click to Enlarge
To determine my level of buying or selling, I use my analysis of the Advance/Decline (A/D) line as
my primary guide. Also it is determined by the number of favorable risk/reward opportunities that
I find as well as the technical readings of the individual issues.
The chart above shows the Spyder Trust (SPY) with the NYSE A/D line and its 34-period weighted
moving average (WMA). On the bottom I have added another measure of the A/D line called the
NYSE A/D Oscillator, which is the spread between the A/D line and its 34-period WMA.
I am most aggressive in recommending new positions when the A/D line has just completed a
bottom formation, such as what occurred in the summer of 2010. The A/D line started acting
stronger than prices on July 22, 2010 (line 1) when it moved above resistance at line a.
In early September, the A/D line surged to a new high, indicating that prices would follow. By the
latter part of October 2010, as indicated by the rectangle labeled b, there were reasons to be a
less-aggressive buyer. First, SPY had been above its rising 20-day exponential moving average
(EMA) since late August and had bounced off of it three times.
Secondly, the NYSE A/D line had been above its weighted moving average for almost two months,
and the spread had formed lower highs (line c). The market did correct after the mid-term
election, and it took until early December before the A/D line resumed its uptrend.
By the latter part of February 2011 (labeled d) the A/D line had been above its weighted moving
average for almost three months and the Oscillator had again formed a negative divergence, line
e.
Of course, I use the long-term analysis of the A/D line to determine the major trend, and while it
made new highs in both May and July, the action was quite choppy until the A/D line broke down
in July. By mid-May, four of the major sectors and the Dow Transports had turned negative, which
limited the buying opportunities.
In September 2011, the A/D line was acting stronger than prices, and it did not make a new low
with prices, line g, on October 4. Such bullish divergences in the A/D line are formed over several
months are generally quite significant.
The A/D line broke through resistance, line f, on October 12, confirming the positive divergence.
This indicated that the stock market had bottomed (see Be Bold, Be Fearless, Buy the Dip).
I recommended many stocks over the next few weeks, but many did not reach my buy levels, as
they took off to the upside. The most recent good buying opportunity occurred on December 27
when the A/D line moved through resistance at line h and started a new uptrend.
NEXT: Getting in Ahead of the Homebuilders Rally
Since early February, I have been suggesting a more cautious stance, as SPY has not even come
close to its rising 20-day EMA for almost 50 trading days. The gap between the A/D line and its

weighted moving average was also quite wide, and recently, the NYSE A/D oscillator has started
to diverge, line h.
In selecting stocks or ETFs, the three most valuable tools are the chart formation; relative
performance, or RS analysis; and the volume, specifically, the on-balance volume (OBV). Because
I try to find a sector or industry group that is outperforming the S&P 500, this is where the RS
analysis is crucial.
Figure 2

Click to Enlarge
A good example of this was the action in the homebuilders in the middle of October. By October
21, I had already recommended the SPDR S&P Homebuilders ETF (XHB) and followed it up
with my analysis of the individual homebuilding stocks (see Big Volume Is Bullish for
Homebuilders). I recommended four stocks then, but will concentrate on Toll Brothers (TOL)
and KB Home (KBH) in todays lesson.
The volume in the homebuilders had been very heavy on October 18, as the original chart of Toll
Brothers (TOL) indicates. The resistance at $16.23 had been overcome, and both the RS analysis
and OBV were positive. The weekly analysis also turned positive at the end of the week. The first
upside target was at $19.40.
Figure 3

Click to Enlarge
My recommendation at the time was to go long at $16.46. The updated chart shows that on
November 1, TOL got as low as $16.77 before accelerating to the upside. The initial target, line b,
was hit on November 8 with TOL making a high in February at $24.22.
The updated chart shows that the RS analysis completed its bottom formation by the end of
October when it overcame resistance at line c. The RS analysis is currently moving sideways,
which is consistent with a correction, not a top. The OBV formed a bullish divergence at the lows,
line f, and is holding well above this support.
My recommendation in KB Home (KBH) turned out much better in the long run, but it was not an
easy trade. On October 18, I recommended buying at $7.04 with a stop at $6.14. This would have
been filled on October 31 with the close at $6.97.
KBH made higher highs in early December but because of the strong weekly RS analysis, I chose
not to tighten the stop. That was a good thing, as on December 28, KBH dropped to a low of
$6.17 before closing at $6.34.
Figure 4

Click to Enlarge
From the original article, my initial target was at $9.30, which was the 38.2% Fibonacci
retracement target. Because of positive market action in early January and the bullish volume in
KBH, I held on to the full position.
On January 24, I recommended selling half the position at $9.90, which was filled on January 25.
The rest of the position was sold on February 16 at $12.56.
This was one of my best trades over the past few months, as the average exit price was $11.23,
so the potential profit was a gain of over 59%.
Of course, there were also some losers. On October 18, I recommended buying Cirrus Logic Inc.
(CRUS). Because it had just broken out above resistance, I implemented a two-stage buying
process.
Figure 5

Click to Enlarge

I often use this when I think that the pattern or technicals are strong enough that I want to be in
the stock or ETF but do not want the risk of a full position at one price level. In this instance, my
recommendation was to go 50% long at $16.16 and 50% long at $15.56 with a stop at $14.25
(risk of approx. 9.8%). These two levels are identified by blue lines on the chart.
Two days after the recommendation, CRUS opened at $14.53, down $2.48 from the prior days
close. Both buy orders would have been filled in this area, and soon after, the stop at $14.25 was
hit when the low was $13.75.
This is a good example of why I recommend having stops in the market so you are not able to
second guess or change your stop. In this example, I was lucky to keep the damage quite low. As
it turned out, by early March, CRUS had rallied above $24 per share, as the volume expanded
nicely in early 2012.
On December 7, I recommended Oncothyreon Inc. (ONTY). The relative performance analysis
had just completed a five-month base formation.
The stock had rallied sharply for the prior few days, so I was looking for a pullback to support, line
d, to buy. I recommended going 50% long at $7.74 and 50% long at $7.46 with a stop at $6.84
(risk of approx. 10%). On December 15 (see arrow), ONTY had a low of $7.43, so both orders
should have been filled.
The stock bounced for a few days and made it back above the $8.00 level before turning lower.
On January 5 (see red arrow), the stop at $6.84 was hit for a 10% loss. The short-term uptrend in
the relative performance (line e) was broken in late December, which was the initial warning.
The RS line did not break to new lows until after the stop was hit, as ONTY had a low of $6.21. In
the middle of February, ONTY made it close to my initial upside target at $9.30 before prices
collapsed.
Some of my best trades come from well-defined chart patterns, but sometimes the price targets
are not hit and you end up with considerably less than you had originally planned. In early
January, I wrote about reverse head-and-shoulders bottom formations that I was observing in
many markets (see The Dominant Chart Pattern of 2012.)
Figure 6

Click to Enlarge
One of the stocks I focused on was Dover Corp. (DOV), which was very close to completing its
reverse head-and-shoulders formation. The upside target from the formation was at $75.51.
I recommended that after a close well above $60.60 (which was well above the neckline), one
should look to buy roughly between $59.90 and $60.25 with a stop under $54.67, which was the
December 14 low.

The following week, DOV closed at $60.85 and then dropped back as low as $58.88 the following
day, hitting the buying zone. As DOV began to move higher, I determined that the 100%
Fibonacci projection target using the rally from the head to the neckline was above $65.00.
Once a position moves in my favor, I generally look for a level to sell half of the position. By doing
this, the overall risk on the position and the portfolio are lowered. Secondly, I think it has a
positive psychological affect.
On January 30, I recommended selling half the position at $65.16 and raising the stop. Half was
sold about five days later. Subsequently, the remaining position was stopped out in early March
(red arrow) at $62.32, and the stop had been raised when I turned more cautious on the market.
The average exit price was $63.74, or a 5.8% gain. This was well below the potential 25% gain if
the target from the chart formation had been met.
I hope these examples help you further understand the methodology behind building a strong
stock portfolio. Of course, other factors also go in my decision-making process, and I hope to
expand on these in the future. Having a concrete plan in place and using a set of criteria that you
believe in are two of the most important steps in building a strong stock portfolio.

Spot Leaders and Losers with RS Analysis

Thursday, June 16, 2011
Tickers mentioned: AAPL, GOOG, WCG, BAC, C
Using real market examples, see how relative performance, or RS analysis, can be used to
pinpoint the markets strongest (and weakest) sectors and individual stocks at any time.
Of all the technical tools that are available today, there is one that I think can help you find not
only the strongest sectors, but also the strongest stocks within those sectors or industry groups.
It is a method that I use frequently in my daily Charts in Play feature, although I dont always
show it in graphical form. It is the relative performance, or RS analysis, which compares one
market to another by plotting a ratio of the two markets.
Most analysts just use it to compare the percentage change of a market averagelike the S&P
500to a particular sector or stock.
Since the 1980s, I have always analyzed indicators like the price charts. I often use moving
averages on the indicator, as well using trend lines to identify support and resistance levels. I
have found this can be a very useful way to identify the winning sectors and stocks, while at the
same time avoiding the losers.
Relative Performance (RS Analysis)
Figure 1

Click to Enlarge
Most investors would likely pick Apple (AAPL) as the top stock of the past few years. Therefore, I
thought it would be interesting to see how the RS analysis performed on this key tech stock.
This daily chart goes back to late 2007. On the bottom is the relative performance, or RS analysis.
In the latter part of 2008, the RS was in a downtrend (line d), as major resistance at the 2008
highs (line c) was evident. This downtrend was broken in late-January 2009 after the RS had
formed higher lows.
On January 22, 2009, I noted the basing action in AAPL and felt that a breakout above $97-$100
on heavy volume should complete the bottom formation.

Apple made higher lows (line b) in March with the RS in a well-defined uptrend at that time. On
March 18, AAPL closed above $100, and on April 6, the major bear market resistance in the RS,
line c, was finally overcome. The OBV also completed its bottom formation.
For the rest of 2009, the RS was in a solid uptrend, line e. While the overall market was topping in
April and May, the RS continued to move higher. The first sign of weakness was in March 2011,
when the uptrend (line e) was broken. A drop in the RS below the April lows will start a pattern of
lower highs and lower lows.
NEXT: How to Find Which Stocks Are Leading the Market
Identify When Small, Mid, and Large Caps Are Leading
Figure 2

Click to Enlarge
Before selecting a stock in a particular sector, I generally have to decide what size company in a
sector is likely to do the best. Therefore, I keep a close eye on how the small- and mid-cap stocks
are doing relative to the S&P 500 (large caps).
The trend line analysis on the RS can often give some early insight as to whether the small- or
mid-cap stocks are acting stronger or weaker than large caps. I often use the S&P 400 (mid caps)
and S&P 600 (small caps) indices, but also analyze the iShares Russell 2000 Index (IWM),
which tracks the small-cap stocks and is a very liquid ETF.
By May 2009, the relative performance, or RS line, for IWM was in a solid uptrend (line e) that
stayed intact until it was broken on October 17 (line 1). This break coincided with the high made
in IWM.
The small caps underperformed for the next nine weeks before the downtrend in the RS, line d,
was broken the week of December 19 (line 2)
The RS was able to stay in its uptrend (line c) until June 12 before being broken (line 3). During
the summers choppy market action, the RS formed a clear downtrend, line d, which was finally
overcome in September (line 4). This was discussed on September 29 (see Can Small Caps
Break Out?).
The small caps acted well until May 7, 2011 (line 5) when the uptrend in the RS, line e, was
broken. The RS is now testing its longer-term uptrend, line e.
The A/D line on the Russell 2000 also failed to confirm the early-May highs. Taken together, this
was a stronger warning signal than I recognized at the time.
Using RS Analysis to Pick Winners
As part of my regular sector analysis, I use not only the RS analysis, but also the actual
performance numbers to find which of the sectors looks best. Though I have been favoring the
health care sector since early this year, it came to the forefront in April, when I discussed the
bullish RS analysis for both the Select Sector SPDR - Health Care (XLV) and the Select Sector
SPDR - Consumer Staples (XLP). To see those charts, click here.
Once you have identified the strongest sectors, you can take it a step further by looking for the
strongest industry groups within that sector.
Figure 3

Click to Enlarge
When you look at the industry groups that make up health care, one sub-group that stands out
are the health care providers, which through June 13 were up 19.6% for the year versus 10.4% for
the health care sector and just a 1.1% gain for the S&P 500.
The Health Care Providers have rallied sharply from the September 2010 lows, as there have only
been shallow pullbacks. The RS analysis versus the S&P broke out to the upside on January 10
(point 1), as it overcame the resistance and prior highs at line c.
Ideally, you would like to pick stocks that are in the strongest industry groups in the strongest
sectors. On the bottom of the chart, I have also plotted (in green) a comparison of the health care
providers to the overall health care sector. In October, the health care providers broke through RS
resistance (line f), indicating that this group was starting to outperform the broader sector.
By March, the providers were clearly outperforming the S&P 500, as the RS had formed a solid
uptrend, line e. The RS consolidated during March and April before breaking through the
resistance at line d (point 2). The RS has since surged to the upside.
One stock in the health care provider group is WellCare Health Care Plans (WCG), and the
daily chart shows a nine-month trading range (line h) that was resolved to the upside in early
January 2011. WCG then rallied from a low of $27.64 to a high of $32.75 before pulling back at
the end of January. The correction retraced 57% of the prior rally, holding above the 61.8%
retracement support.
By February 11, the RS had surpassed major resistance at line i and the OBV had also broken
through the resistance at line j. These were very positive signs, and the weekly analysis
confirmed the breakout.
The daily chart show a powerful rally over the past few months, as WCG is up by more than 60%
in 2011, over three times greater than the health care providers Group (up 19.6%), and 59%
better than the S&P 500.
NEXT: Using RS Analysis to Avoid Losers
Using RS Analysis to Avoid Losers
After a rally in early 2011, the financial stocks have been much weaker than the S&P 500, and the
relative performance analysis identified this weakness. The RS analysis can do a very good job of
highlighting those stocks that you should avoidor those you should consider for bearish
strategies.
Figure 4

Click to Enlarge
For most, it will be another filter that can eliminate stocks from a buy list, no matter how
compelling the fundamentals may seem. On May 13, I highlighted The 4 Worst Bank Stocks, as I
had been sharing my negative outlooks for Bank of America (BAC) and Citigroup (C) for
several months prior.
JPMorgan Chase (JPM) had violated RS support, line c, on April 15 when the stock closed at
$43.90. The RS has continued to decline since, with JPM reaching a recent low of $40.10.
During this time period, JPM has declined almost twice as much as the S&P 500. The well-defined
downtrend in the RS and the weak OBV gives no indication that JPM is ready to turn around.
Goldman Sachs (GS) was also featured in that May article, and the RS analysis showed that it
had broken the RS support, line f, on January 23 when the stock closed at $166.30.
The uptrend on the price chart, line e, was not broken until almost two months later, on March 16.
I have frequently seen similar signals where a breakdown in the RS will precede a breakdown in
price by several weeks, if not longer. So far, the June low for GS is $130.50, as it has dropped
21.5% since the RS broke support.
Figure 5

Click to Enlarge
This type of analysis will work on any sector or stock. On April 13, just before Google (GOOG)
was set to release earnings, I pointed out the potential head-and-shoulders (H&S) top formation. I
then noted that the RS had already broken support on February 22 (point 1) with the close at
$610.21, and the RS had since formed a series of lower lows, line c.
The break of RS support and its clear downtrend made it more likely that an H&S top would be
completed and that the reaction to Googles earnings would be negative. Two days later, the
earnings were released and GOOG gapped through the neckline (line b) on heavy volume (point
2), completing the H&S top formation.

To calculate the measured target from the H&S top formation, you take the high price when the
head was being formed ($642.96) and calculate the difference between it and the neckline
($553.31). This gives you (646.96 - 553.31) 93.65. This number is then subtracted from the
neckline to give the downside target at (553.31- 93.65) $459.66.
With GOOG now trading around $500, it has the potential to decline another $40 from here.
Though the daily RS analysis has moved sideways for several weeks, the weekly and daily onbalance volume (OBV) readings remain negative, suggesting that the stock has not yet bottomed.
Figure 6

Click to Enlarge
With the overall stock market correcting and despite the increasing bearish sentiment, now is the
time to be looking for those stocks that are doing better than the S&P 500. One of the stocks I
talked about early this week is an excellent example of what I am looking foreven though it is a
utility stock.
Southern Company (SO) overcame seven-month resistance in April, line a, which was confirmed
by the volume analysis. It is now retesting the breakout levels and the uptrend.
Even more important is the RS analysis: The downtrend from September (line c) indicated that SO
was underperforming the S&P 500. The break of this downtrend in March was the first sign of a
change. The move through resistance at line d completed the bottom formation (lines d and e)
and signaled a new uptrend in the RS.
This was a sign that SO should outperform the S&P 500, which it has done. Therefore, the current
pullback should be a good buying opportunity.
Investors can do similar analysis to what I have discussed for free online, as most Web sites that
provide stock charting will also allow you to compare a stocks performance to a major average
like the S&P 500 or an appropriate sector or industry group.
To draw the trend lines, you may have to do it on a printed copy, but I think your efforts will be
rewarded.

Surging Volume Sends Early Warning

Wednesday, March 28, 2012

By Tom Aspray, Senior Editor, MoneyShow.com

Tickers mentioned: MMR, ETE, BCS
High-volume selling seen in these stocks can serve as a potential early warning signal that its
time to take profits, sell altogether, or even play the short side using put options.
As I discussed in detail last week, volume plays an important role in the process I use to find and
recommend stocks to buy. The same volume scan can also alert the investor or trader to stocks
that are under unusual selling pressure. An early warning of a change in trend can often be given
by a significant increase in volume.
If you are long a stock that weakens on unusually high volume, take a hard look at the technical
reading so you can determine whether longs should be sold or stops should be raised. Traders can
also use this analysis to find stocks to sell short or buy puts against.

The same sort of entry and stop analysis that is used on long positions should be used on short
positions as well. These three stocks showed up on my latest volume scan following Tuesdays
close.

Click to Enlarge
Chart Analysis: McMoRan Exploration Corp. (MMR) is a $1.8 billion independent oil and gas
company. The stock was down 7.6% on Tuesday on volume of over 20 million shares, which is
almost eight times the daily average.
The daily chart shows that MMR closed below the uptrend, line b, last Thursday
Next good support is in the $10 area with more important support at the October 2011
lows at $8.25
The break of support was confirmed by the relative performance, or RS analysis, as it also
violated support at line d. The RS line had formed sharply lower highs, line c
Tuesdays very high volume is evident on the daily chart, and the on-balance volume
(OBV) broke support, line e, on Monday
MMR is likely to rebound after the recent sharp drop. Initial resistance is at $11.55 and
stronger resistance is at $12-$12.50. It would take a daily close above $13.20 to suggest
the trend had changed
Energy Transfer Equity LP (ETE) is a $9.1 billion oil and gas pipeline limited partnership. It
currently yields 6.1%. On Monday, the company completed its $5.5 billion merger with pipeline
company Southern Union Co.
The uptrend going back to the October low, line f, was broken with Mondays close
Next support is in the $39.20-$39.60 area, which includes the 38.2% Fibonacci
retracement support
The 50% retracement support level is at $37.63
RS analysis topped out in early March when support at line h was decisively broken. The
RS line had diverged from prices, line g, at the recent highs
OBV dropped below its weighted moving average (WMA) on March 21 and broke below
support, line i, on Monday
First resistance is at $41.20-$41.60 with much stronger resistance at $42.60-$43
NEXT: Unusual Volume Seen in Shares of This Big Bank

Click to Enlarge
Barclays Bank PLC (BCS) is a $48.7 billion money center bank that currently yields 4.60%.
Tuesdays volume of 18.5 million shares was over three times the daily average.
BCS opened Tuesday at $16.41, which was just above the prior twin highs of $16.34 and
$16.38
Next support is now at $15.08 with more important support at $14.75, line a. A close
below this level will confirm a daily top
The uptrend, line b, is now in the $14 area
The RS line has formed lower highs over the past two months, and a drop below support at
line c would be consistent with a top
More important RS line support is at line d
Daily OBV is still above its uptrend, line f, and did make marginally higher highs, line e, on
Monday
Once above $16.41, there is further resistance at the July 2011 high of $17.19
What It Means: It is a good idea for all investors to keep an eye on the volume levels of the
stocks in their portfolio. Whenever daily volume is more than double the 30-day average, it is
providing the investor with information that should not be ignored.
McMoRan Exploration Corp. (MMR) is getting oversold in the short term and is likely to
rebound.
Energy Transfer Equity LP (ETE) and Barclays Bank PLC (BCS) both appear to be completing
daily top formations. As part of the learning process, they would be good stocks for investors to
watch. If the volume surge is an early warning that investors are starting to dump these stocks,
then key support should be broken in the near future.
How to Profit: Put buyers should observe the same sort of technical rules that stock investors
follow. The entry point is very important, as puts should be purchased when the stock rallies back
to resistance. It will require more discipline, but often times, mental stops based on the stock
price often work better than stop levels on the individual options.

Sector Selection Is the Key for 2012

Friday, January 06, 2012

By Tom Aspray, Senior Editor, MoneyShow.com

Tickers mentioned: XLU, XLV, XLI, XLP, XLB
A proven combination of technical methods that successfully identified the strongest and
weakest sectors in 2011 is applied to discern where the best buying opportunities will appear in
2012.
The sector performance in 2011 further illustrates the years volatility. Many sectors had a few
strong quarters, but the yearly performance numbers do not reflect the wide price swings. Since
the S&P 500 and its tracking ETF, the Spyder Trust (SPY), were essentially flat for the year, all
the other Select Sector SPDR ETFs except for Financials (XLF), Materials (XLB), and Industrials
(XLI), performed better.
As the table below indicates, the swings in the Select Sector SPDR - Energy (XLE) were
probably the most dramatic. XLE had the two best quarters, as it was up 16.8% in the first
quarter and up 21.8% in the fourth quarter. However, due to the 22.3% drop in the third quarter,
XLE was only up 1.3% for the year. If it wasnt for the strong fourth quarter, the yearly numbers
would have been much worse for all of the sectors.

Click to Enlarge
The Select Sector SPDR - Utilities (XLU) was the star performer in 2011, up 14.8% while both
the Select Sector SPDR - Consumer Staples (XLP) and Select Sector SPDR - Health Care
(XLV) both gained over 10% for the year. All are considered defensive sector ETFs, so in hindsight,
this should have not been a surprise. Health care was a favored destination starting in early 2011,
but it would have been nice to have avoided the 10.7% drop in the third quarter.
It is no surprise that the Select Sector SPDR - Financial (XLF) was the worst performer, down
18.5% for the year, and the second worst performance was the 12.8% decline in the Select
Sector SPDR - Materials (XLB). The relative performance, or RS analysis, kept us pretty much
out of these two sectors, but the question now is regarding where the opportunities will be in
2012?
NEXT: Will 2011's Standout Sector Shine Again?

Click to Enlarge
Chart Analysis: The weekly chart of the Select Sector SPDR - Utilities (XLU) looks ready to
reverse this week and close lower. This suggests that it may decline further next week.
There is good weekly support, line a, in the $34.22-$34.30 area with more important
support at $33.18, which was the November low
Seasonal trend analysis reveals that the utilities sector and XLU typically top in late
December and bottom in March
The rally from a March low typically tops in June with the next major low in October
The weekly RS line (not shown) will drop below its weighted moving average (WMA) this
week and the weekly on-balance volume (OBV) failed to confirm last weeks highs
Resistance for XLU now stands at $36
NEXT: The Most Attractive Sector ETF for New Buying

Click to Enlarge
The daily chart of the Select Sector SPDR - Health Care (XLV) broke through converging
resistance (lines a and b) in the latter part of December. The daily chart shows a pattern of higher
highs.
XLU has further resistance at $36 and $36.44 with the weekly Starc+ band at $36.25
Relative performance has formed lower highs, line d, and has not confirmed the price
action
A drop below the December lows and the uptrend (line e) will suggest that XLV is starting
to underperform the S&P 500
The daily OBV looks much stronger, as it made new highs and has good support at line f
Weekly RS and OBV (not shown) look much stronger as well
There is initial support at $34.30 with the uptrend (line c) and the 38.2% Fibonacci
retracement support at $33.25
The Select Sector SPDR - Industrials (XLI) was down 3.2% and was the third-worst performer
in 2011. XLI had a great fourth quarter, gaining 16.6% and rallying back to the major 61.8%
Fibonacci retracement resistance at $34.70.
There is stronger resistance and the weekly Starc+ band just above $37. The July high was
at $38.43
RS analysis formed a divergence at the April high (line h) and completed a top in May
The weekly RS now appears to have bottomed out, as it has moved above its rising
weighted moving average
Weekly OBV also appears to have bottomed, but that signal is not quite as strong. It has
broken its downtrend, line i, and is above its weighted moving average while lagging the
price action
There is first support for XLI at $33.40-$33.80 with stronger support at $32.60
What It Means: Though we may not see as many wild price swings in major sectors this year,
careful sector analysis is likely to make a big difference in your portfolio performance.
I continue to think that the combination of RS and OBV analysis on both the weekly and daily data
is the best way to identify the strongest and weakest sectors. When this analysis agrees with the
seasonal tendencies, the odds become shifted even more in the investors favor.
Two of the strongest sector ETFs, the Select Sector SPDR - Utilities (XLU) and Select Sector
SPDR - Health Care (XLV) look ready for a pullback as money may begin flowing into lessdefensive sectors. This may also be true for the Select Sector SPDR - Consumer Staples
(XLP).
Currently, the most attractive sector ETF for new buying is the Select Sector SPDR Industrials (XLI), and that helps to explain why my recent Dow Portfolio is doing so well.
How to Profit: For the Select Sector SPDR - Industrials (XLI), go 50% long at $34.14 and
50% long at $33.62 with a stop at $31.88 (risk of approx. 5.9%).
Portfolio Update

For the Select Sector SPDR - Utilities (XLU), buyers should be 50% long at $34.86 and 50%
long at $34.52. Use a stop at $33.08.
As recommended in mid-August, investors should be 50% long the Select Sector SPDR Consumer Staples (XLP) at $29.08 and 50% long at $28.88. Use a stop at $31.18 and sell half
the position at $33 or better.
For the Select Sector SPDR - Technology (XLK), buyers should be 50% long at $23.66 and 50%
long at $23.12. Use a stop now at $24.48.