Buy Signal for Sector ETFs (SPY, XLP, IAT, SMH, XLE)

There are two major techniques that investors use when looking at the stock market, fundamental or technical analysis. Fundamentals will take into consider the company’s financial statistics and analyze ratio such as price-to-earnings and book value. Technical analysis will concentrate on past performance of the stock by looking at the charts.

A mix of both works the best for long-term investing, but for this article the focus will be on the charts and technical analysis.

One method of determining when a chart is oversold or overbought is by using an oscillator. The RSI (relative strength index) compares a stock to itself and determines if the recent gains/losses make the stock overbought or oversold. The indicator ranges between 0 and 100 with below 30 considered oversold and above 70 the overbought range.

A buy signal occurs not when the chart moves to below 30, but when the RSI moves back above 30 and out of oversold territory. The SPDR S&P 500 ETF SPY triggered and RSI buy signal this week and today several more ETFs are flashing the same buy signal.

Below is a list of just a few of the ETFs that have their RSI crossing out of oversold territory.

SPDR Consumer Staples ETF XLP – After dropping 8 percent from an all-time high set in November, the ETF found support at the $39 area before rallying the last three days.

iShares Dow Jones Regional Banks Index ETF IAT – The ETF showed great relative strength in early January before falling 9 percent from an all-time high. The support area for IAT is $31-$31.50.

Market Vectors Semiconductor ETF SMH – The 7 percent pullback from a multi-year high brought the ETF back to the breakout level of July 2013 and it was able to hold support at the $40 area. The bounce today and the RSI are confirming the buy signal today.

SPDR Energy ETF XLE – The ETF hit significant resistance at the end of last year near $90 and fell 10 percent before catching some buying this week. For the buy signal to remain intact the ETF must hold the $81 area.

The RSI indicator and the buy signals that are generated do not always work and are not as accurate when other factors are not considered. The ETFs above have met other technical criteria and that is why they have been chosen to be highlighted in the article.