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This column was originally published on RealMoney on Nov. 10 at 1:39 p.m. EST. It's being republished as a bonus for readers.

The sustainability of any market rally is only as good as the sectors and stocks participating in it.

At this juncture, we should become very cautious, as there are several key sectors in which momentum is clearly downward. Although the market has rallied for three months, with one or two of these key sectors lagging behind, the aggregate picture should give you the sense that there's a better time and place to put your hard-earned money to work.

A Look at the Homebuilders

A daily chart of the

SPDR Homebuilders

(XHB) - Get SPDR S&P Homebuilders ETF Report

shows that the housing sector bottomed along with the general market back in July. However, the rally in housing stalled in October as prices moved higher, but without any momentum.

Prices in the XHB have formed a head-and-shoulders top, and they have already broken through the neckline, forming a significant down-thrust pivot. That suggests strong downside momentum.

SPDR Homebuilders

Click here for larger image.

Source: The

The indicator in the middle panel is a McClellan Oscillator, which is constructed from the underlying stocks within the sector. The McClellan Oscillator is a derivative of the advance-decline line, and this short-term measure shows that the sector is now oversold.

The indicator in the bottom panel is a McClellan Summation Index. This is a better measure of the intermediate-term direction within the sector, and as you can appreciate, momentum within the sector is down.

Because of the short-term oversold condition, I would expect the XHB to bounce, but because the intermediate term is down, rallies should be sold.


As housing goes, so goes the consumer, which is represented here by the retail sector. A daily chart of the

Retail HOLDRs

(RTH) - Get VanEck Retail ETF Report

is shown below.

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Retail HOLDRs

Click here for larger image.

Source: The

RTH peaked two weeks after the housing sector made its highs. In October, RTH had four pivot thrusts higher (yellow oval), but none of these was significant. Without upside momentum and wedging higher, RTH gapped lower below support (orange line) on very heavy volume, making a significant down-thrust pivot.

Confirming the price action within the sector is the McClellan Summation Index, shown in the bottom panel. It is headed down, suggesting that any rallies should be sold. The orange support line becomes resistance, and the next area of support for RTH is the 200-day moving average.

Financial Services

The financial services sector was one of the earliest and strongest participants in this rally, and now I believe the sector is beginning to roll over. A daily chart of the Amex Securities Broker/Dealer index, or XBD, is shown here.


Click here for larger image.

Source: The

For the past month, prices in the XBD have been consolidating into a pennant pattern near their all-time highs. Earlier in the week, prices did break out (above the orange trend line) but that breakout has turned into a fakeout, as prices reversed yesterday.

While I don't see any major downside yet, this is just a warning sign that the upside is going to be limited for a while. Confirming this view is the McClellan Summation Index, shown in the lower panel. Stocks within the sector are beginning to roll over.


In mid-October, the semiconductor sector, as represented by the

Semiconductor HOLDRs

(SMH) - Get VanEck Semiconductor ETF Report

shown in the chart below, failed at the 200-day moving average.

Semiconductor HOLDRs

Click here for larger image.

Source: The

With this speculative darling breaking down, the market really has been flat. You need speculation to propel prices higher, or, put another way, a rally without a speculative fever is doomed to fail.

Prices in the SMH have been consolidating within a range for two months now, and they remain below a down-sloping 200-day moving average. Despite the failed attempt to break above the 200-day moving average, there has been very little downside price pressure. There have been no significant downside pivot thrusts since the lows in July. Price is now at support. The McClellan Summation Index, shown in the lower panel, has stalled as well.

Essentially, we can say that the market's fate lies with this chart, as the resolution of this consolidation should be very telling. A break above the 200-day moving average means it's game time for the markets once again. A break that sticks below support? Look out below.

At the time of publication, Lerner had no positions in any of the stocks mentioned in this column, although holdings can change at any time.

Guy Lerner is an anesthesiologist and freelance writer who trades for his own account. He blends technical and fundamental analysis to find factors that lead to sustainable moves in the markets. Lerner's approach is research-driven and focuses on supply-demand issues, investor sentiment, intermarket relationships and monetary liquidity. He is a member of the Market Technicians Association and is the founder of

, a Web site that offers content, commentary and strategies for investors and traders. Under no circumstances does the information in this commentary represent a recommendation to buy or sell stocks. He appreciates your feedback and invites you to send your comments by

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