Filed Under:
Tickers in this Article: IYR, IYT, XLE, GDX
Last week we took a look at ETFs that track the Global Markets to see what clues they were offering and noted how many international markets had broken down ahead of the U.S. This week, with the global markets are as interrelated as ever, weakness abroad can easily foreshadow a similar move in the U.S. markets. Another way to use ETFs to assist in market analysis is to follow the ETFs that track specific sectors. This allows a trader to key in on internal trends, which can provide even more clues about the health of the general markets. Often, individual sectors will act ahead of the markets and provide traders with a more broad view of the existing trend. (For more, see Singling Out Sector ETFs.) IN PICTURES: 7 Tools Of The Trade

The commercial real estate group has been one sector that has been able to perform well despite a generally negative outlook from traders. With the general markets at new lows, it's interesting to note that the group, as represented by the iShares Dow Jones US Real Estate (NYSE:IYR) ETF continues to maintain its trend of higher lows and higher highs. That's not to say IYR has not been impacted by the recent correction, but technically speaking the existing trend remains intact. This will be a key sector to watch in the coming weeks, as a break below the pivot low set in early 2010 near $41.50 would warn of a possible intermediate top in this sector, and probable further weakness in the general markets.

Source: StockCharts.com


Another sector that is important for traders to monitor is the transports. The group, as represented by the iShares Dow Jones Transportation Average (NYSE:IYT), is also still in a pattern of setting higher highs and higher lows. This is a positive for the markets as this group depends on a strong consumer and the need for goods to be shipped. Much like IYR, traders should key on the lows set earlier this year as an important level to monitor. A drop below this level would break the current pattern by setting a lower low and would have negative implications for this group and the general markets.

Source: StockCharts.com


One group that has already set a lower low is the energy group. The sector, as represented by the Energy Select Sector SPDR (NYSE:XLE), actually dipped under a prior low earlier this year, and then decisively undercut this level a few weeks ago. This group has been impacted by the recent oil spill in the gulf, so the breakdown has to be taken with a grain of salt. However, the fact remains that energy stocks may have topped here, and could be headed even lower. The $55 level in XLE will be an important level to watch as this level was acting as support until the recent breakdown. A move back above this level would be positive as XLE would return into its consolidation range. Looking lower, the next solid support level lies near $45-$48.

Source: StockCharts.com


Market Vectors Gold Miners ETF (NYSE:GDX) is one group that has been in the spotlight recently with gold moving back to new highs. While GDX has performed well in 2010, in looking at the larger trend, GDX appears to be in a larger consolidation that began last fall. The pattern of higher highs and higher lows appears to have stalled, as GDX set a slightly lower low in early 2010 and a lower high this May. GDX remains well above key support near $40, and this would be the level that would imply a top in this group. One reason this group is important to track is its close relation to the price of precious metals and inflationary pressure on the economy.

Source: StockCharts.com


Bottom Line
What is interesting in this trip through some sectors is how some key groups have not broken from their intermediate uptrends. While it is impossible to predict exactly what will happen next in both these sectors and the general markets, the trader who closely monitors the health of these key sectors will have a great advantage over traders simply monitoring the S&P or Dow Jones. If these sectors head lower and break key support levels, this will confirm a reversal in the underlying uptrend that has been in place since March 2009. However, if these sectors hold support and turn higher, they could foreshadow an end to the correction. (For further related reading, see Sector-Based ETFs Spread Out The Risk.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

At the time of writing, Joey Fundora did not own shares in any of the companies mentioned in this article.

comments powered by Disqus
Trading Center