Confirmation Principle to Sector Analysis & Assess the State of Broader Market

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Day Trader’s & long-term Investor’s can apply confirmation principle to sector analysis & assess the state of broader market. The principle of confirmation is important, this principle asserts that the sector averages should confirm with each other when making new highs and/or new lows. In other words, major sectors should make new highs and/or new lows to affirm the broad market trend.

Team Day Trader S&P 500 Pie Chart

Now, I’m not going to use all nine Spider Sectors, because the bottom four sectors account for less than a quarter of the S&P 500. Also note that the Materials $XLB & Utilities $XLU weigh less than 3% each.

The top five sectors account for over three-quarters of the S&P 500 & these are the main drivers for the benchmark S&P 500 index. These include Technology $XLK (25%), Financials $XLF (15%), Health Care $XLV (13.7%), Consumer Discretionary $XLY (12.3%), & Industrial $XLI (10.1%).

Four of these five sectors belong to the “offensive” side of the market & are the ones we want to see leading. Healthcare is traditionally a “defensive” sector, but there are a fair number of biotech’s in this sector. Regardless, it’s still the third largest sector & can’t be ignored because of its influence.

The chart below shows these five sectors with the largest at the top, Technology, & the smallest at the bottom, Industrial. First, notice that Technology $XLK was the only one to record a new high in late February (green dashed line). The other four did not reach their prior highs & didn’t confirm the largest sector (red dashed lines). These non-confirmations reflects narrowing participation. As a comparison, note that all five recorded new highs in late January.

Team Day Trader 2018-03-04-FLEXIBLE_GRID

The red “Support Break” mark short-term support from the late February swing lows. Notice that Technology $XLK green “Held Support” level so far, but the other four broke their support levels. Again, we see technology holding up well, but the other four breaking support. Even though technology still looks strong, the other four sectors, which account for 51% of the S&P 500, broke support & after then non-confirmations.

The red “Lower High” line now marks resistance based on the late February highs for the four sectors that broke support. Upside breakouts are needed to put these four back on the bullish track, and hence the broader market. Day Trader’s & long-term Investor’s should also watch Technology $XLK, because it’s by far the largest sector & a support break would seriously weigh on the broader market.

Hopefully helpful & stay up-to-date on all of this week’s action by visiting Team Day Trader’s blog Tuesday’s thru Friday’s, & on Sunday’s.

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