I noted on my last blog that several of the S&P500’s major sectors failed to confirm the S&P500’s new highs on May 22nd.
One of those sectors that failed to confirm a new high was the healthcare sector. This is particularly important because healthcare has been a prime driver of the bull market recently.
The S&P healthcare sector (XLV) shows typical bull market characteristics in most regards–and as such, should continue to be considered in a bull market until the trendline is broken. However, you may want to watch for continued divergence on the MACD, RSI and Stochastics indictors against the trend. I’ve marked these divergences on the chart below. If you’ve read my book Sideways, you know that I place trend as the top priority, and momentum studies as less important to your decision making. However, diverging momentum can be considered a “yellow alert” for investors to be extra mindful of a potential change in trend.
Biotech, a somewhat related sector to healthcare, is also showing potential signs of diverging momentum indicators. The XBI ETF is – like healthcare- in an uptrend. As with healthcare, I would recommend staying with the trend if you are long the sector – but keep an eye on this divergence, and on the trendline. Sometimes you get false signals on momentum divergences, but I’ve seen enough accurate follow-through to pay attention to these signals.
View Keith’s BNN Top Pick’s segment
Click here to view the BNN Top Picks segment of MarketCall last Friday.