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XLRE next S&P500 sector to tip into red?

If S&P500 continues to weaken, Real Estate (XLRE) could be next sector to tip into red. Chart pattern shows a bearish divergence and rising wedge that signals potential reversal.

 

XLRE, XLP and XLF 3 weakest ‘winners’

Using performance of Sector SPDR ETFs as a guide, apart from the Energy sector represented by XLE (XLE ‘buyer’s remorse’, loses post-Trump election gains) which is down over 17% since the beginning of the year, these are the next three weakest S&P500 sectors:

  • Financials XLF up 5.89% YTD
  • Consumer Staples XLP up 6.75% YTD
  • Real Estate XLRE up 4.25% YTD

If overall weakness continues, anyone of these could be the next to go into red. XLRE is weakest at the moment.

SectorSPDR heatmap of US sectors performance YTD

SectorSPDR heatmap of US sectors performance YTD

 

If we compare their performance from the beginning of 2016 instead of 2017, then Real Estate’s weakness becomes even more prominent.

 

XLRE weakest of the lot; bearish chart pattern

As can be seen from this overlay below, a bearish divergence shows up in XLRE’s performance. While it’s peers are making new highs this year, XLRE could not even beat it’s own high printed in July last year.

Overlay of SPY, XLRE, XLP and XLF ETFs from beginning 2016 - present

Overlay of SPY, XLRE, XLP and XLF ETFs from beginning 2016 – present

 

XLRE chart pattern suggests a rising wedge (reversal) pattern in progress.

XLRE chart pattern suggests rising wedge (reversal pattern)

XLRE chart pattern suggests rising wedge (reversal pattern)

 

According to Investopedia,

Rising Wedge
Conversely, a rising wedge is a bearish pattern that signals that the security is likely to head in a downward direction. The trendlines of this pattern converge, with both trendlines slanted in an upward direction.

Again, the price movement is bounded by the two converging trendlines. As the price moves towards the apex of the pattern, momentum is weakening. A move below the lower support would be viewed by traders as a reversal in the upward trend.

As the strength of the buyers weakens (exhibited by their inability to take the price higher), the sellers start to gain momentum. The pattern is complete, with the sellers taking control of the security, when the price falls below the supporting trendline.

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Director, TerraSeeds Market Technician Pte Ltd. Trader, investor. @sohtionghum was picked ‘Top 70 Forex Twitter in 2015’. Operates multiple strategies.

“Dear reader, I do not have a financial license to give advice. I do not know you the reader. Your financial objective and risk tolerance may be different from mine. I am not responsible for any consequence of your action.

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