Which Key Sectors Have the Ability to Support the Market

Wednesday was another disappointing day for the market as many short-term buyers from Tuesday got flushed out in the move lower. However, with a second down day, should we be worried about a potential correction? Or is the market still holding its main support?

To answer this, first let us note two important sectors that are holding over major support: the Retail ETF (XRT) and the Transportation ETF (IYT). Both are currently over support from the 50-day moving average. If these can hold their bullish trend, it will show that the demand side (IYT) and the consumer sentiment side (XRT) still have investor’s support. Additionally, if more stimulus is expected, these will continue to outperform and therefore boost the major indices.

On the other hand, the Biotech sector (IBB) and Semiconductors (SMH) are sitting underneath their 50-day moving average. Although IBB had already broken underneath the 50-DMA late last week, it has continued to move lower.

In the past, we have mentioned that the best way to understand if there is a potential pullback is to wait for multiple key sectors to break their bullish phases. If, on Thursday, SMH is not able to rally back over its 50-DMA, it will confirm its entry into a cautionary phase. This makes Thursday pivotal as we watch for more sectors to break down or hold.

Having said that, the government will want to appease a rowdy market, with its next new stimulus bill set to come soon. With that in mind, it is tough to take a bearish stance knowing that their will be underlying support. Furthermore, the yields which have risen, and might be dealt with using Operation Twist. That means that the Fed will buy the longer-term bonds and sell the shorter-term bonds thereby, twisting the yield curve back. This was done in 2011 and 2012 and it did indeed help stimulate the economy.

The biggest takeaway is that the Fed is not out of tools, and that this rotation from a big tech rally to a more consumer demand/industrial/transportation rally is a good sign for the economy going forward.

  • S&P 500 (SPY):  Sitting on 380.71, the 50-DMA
  • Russell 2000 (IWM): 230.32 resistance. Support 314.80 to 312 area
  • Dow (DIA): 309 support. Resistance 320
  • Nasdaq (QQQ): If can’t get back over 310, could see larger mover lower
  • KRE (Regional Banks): 63.65 new support
  • SMH (Semiconductors): Needs to get back over the 50-DMA at 234.69
  • IYT (Transportation): Holding. All-time highs at 241.36
  • IBB (Biotechnology): Broke support. Next main support the 200-DMA at 143
  • XRT (Retail): 85.69 resistance. 10-DMA at 80.21

Mish Schneider


Director of Trading Research and Education

Forrest Crist-Ruiz


Assistant Director of Trading Research and Education