Whilst we tend to look at specific setups for the most part I was taking a look at some of the GICS sector charts in Australia and I think that it illustrates how by looking at the major sectors you can get a good idea of where the market momentum is coming from – no surprises there. What is worth considering though is that as a trader you may need to be a bit more sector specific when it comes to feeling bullish or bearish.
Starting here with the Grand-Daddy of all our market sectors you have financials. This of course is dominated by the big 4 banks and you can see on this weekly chart that this has been an area of range trading in the market. One of the big questions at the moment is why the Australian market is underperforming the US given the strength of our economy? The reason I think can be found here because if your largest sector is only treading water in a capitalisation weighted world it will blunt any upward movement in other areas.
You should note the 50% Fibonacci retracement on the weekly as it seemed to stop the rally in the financial dead in its tracks leaving to plod sideways ever since.
If we zoom in on the daily time frame things start to look a little more rosy. Looking at this chart you can see the beginnings of a trend starting to form. This trend will be worth keeping an eye on as a measure of market favour toward this sector.
The place where everyone focusses attention at the moment is in the materials sector – and with good reason given the gains that we have seen within the area. Depending on how you look at it though there may be some dark clouds beginning to form. If you look at the chart above there are a couple of potential setups beginning to unfold.
The first of those is referred to as a ‘3 drives to a high’. This occurs as you can see, when there are 3 peaks made in the price that can be covered by a straight line as shown. Depending on how this is treated, the trader may view this as a short once the 3rd peak has successfully formed. Alternatively this could be viewed as a wedge formation which would mean that the trader would take more of a short bias once the lower line of the pattern is breached. Of course the trader would also become more bullish if there was a breakout through the top line.
The consumer staples sector shown above in not surprisingly considered one of the more defensive so if we do see some selling pressure on the wider market this is one that we may see some rotation into.
Interestingly though there are 2 trendlines in play here – one rising and one falling. The falling one is not a typical one but you can see that the levels represented by it are thus far being respected by the price. What I will be interested to see is which of these will win out – it doesn’t look like we will have to wait long to find out because they are due to intersect before long.
The last sector that I want to look at is energy. Naturally this is heavily in focus at the moment given the state of the oil market and the interest in commodities at large but this too is at something of a point of intersection.
You can see in the chart above that the price is trading within a symmetrical triangle. This pattern has no specific bias to the upside or the downside so the trade will generally wait for a breakout before making too many conclusions about where the sector is headed. The payoff for this though is that it allows for your stops to be tightened up and/or for positions to be trimmed/closed/reversed/expanded depending on your view of the market.
You can see that by looking at the sectors of the market you can take a view that lies somewhere between specific stocks and the market as a whole which can be useful especially when taking more of a top-down approach.
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All the best