Stock Consolidation Phase Favors Bulls

Taking a look at index and sector ETF charts, most consolidated during the past week. Until price breaks out of consolidation, neither bulls nor bears hold the advantage. At the same time, the dominant trend is still higher, and support levels are generally closer to current price than are resistance levels.

- SPY (SPY) consolidated under the 95.00 level this week. Price has support around the 90.00 area in the form of the 50 and 200 day moving averages, which are about to cross in a bullish fashion. Last week’s high was 96.11. A break above that level should squeeze the shorts.

- Powershares QQQ (QQQQ) has been trading in a ascending channel. Drawing fibonacci retracements from the September high to the double bottom lows, we can see price consolidating at the 50% retracement level. Price could find support at the ascending trendline, the rising 50 day moving average, at the 38.2% retracement level, or around 33.00. In other words, there are a number of support levels below the current level, although they are spread out. A convincing break above 37.25 would signal another leg higher.

- iShares Dow Jones Transportation Average ETF, IYT: The transports show a big spike in volume on Friday. I’m not sure what that means. Price is stuck below the 61.50 area, and a break above that level would be a bullish signal. The rising 50 day moving average could provide support.

- Industrial Select Sector SPDR ETF (XLI): The industrials are still setting higher lows and higher highs. Price sits above the 200 day moving average, with the rising 50 day about to cross. The bulls definitely hold the advantage here for now. I would be looking to buy on a convincing move above 24.00.

- Materials Select Sector SPDR ETF (XLB): The materials sector is consolidating in a narrowing range, and remain above a rising trendline. A convincing break above 28.50 would indicate another leg higher.

- Market Vector Steel ETF (SLX) is in a clear rising trend, but could use a rest. Given the nature of the current market, it could simply keep going, but I will be looking elsewhere for trades.

- Oil Services HOLDRs ETF (OIH): Oil services are also in a clearly-defined trend. I currently hold several long positions in this sector, and particularly like stocks related to natural gas.

- United States Natural Gas ETF (UNG): The natural gas ETF shows a large increase in volume at the lows, and is near a trendline break. Also, there is considerable media attention concerning the difference between oil and natural gas prices. Although natural gas inventories are high, the chart indicates further upside. I am currently holding this ETF long.

- Consumer Discret Select Sector SPDR (XLY) is a sector I consider to be overvalued. At the same time, many consumer discretionary stocks carry high short interest, so breakouts get extra fuel from short covering. Price currently sits below a double top. While I am not looking to trade the long side on consumer stocks, an XLY break above 24.60 would certainly be a bullish signal for the broader market.

-iShares Dow Jones US Real Estate ETF, IYR is another overvalued ETF in my book. But it’s still trending higher for now. A break above 35.60 would put price above recent closing highs, and also the 200 day moving average.

- Financial Select Sector SPDR ETF (XLF) is trading in a narrowing range near the 200 day moving average. I get the sense that the financials could be the cloud that rains on the bulls’ parade, but for now the chart looks neutral.

So, we are still consolidating for now. Until the signals become clearer, the best strategy would be to keep the powder dry. At the same time, so many charts are sitting immediately under critical resistance, we could easily see a scenario where many sector ETFs trigger buy signals at nearly the same time. I have given my alert levels above. If the market should start to move higher out of this consolidation, each alert would give further evidence of a broader market breakout.

Of course, underlying this potential bullish scenario is a sick economy. I actually came into the weekend expecting to see a more bearish scenario, and continue to think this market is overvalued at current levels. However, looking at the charts, the bulls have a much easier path to pushing momentum in their direction.

I will have individual stock charts up later this weekend.

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