Bollinger Band breakout from last week. Sector RSI divergences form

25 February

Last week, I showed a sector pair that was poised to break higher from a Bollinger Band contraction. It promptly broke higher with Friday’s close.

Morgan Stanley Consumer Index (CMR) v Morgan Stanley Commodity Related Equity Index (CRX)

• The 40 week Bollinger Bands were their tightest for three years
• The 40 week moving average trends up
• The upper band was broken on an end of week basis and there was an expansion of the band width

The CRX is quite a strange index, not really representative of the commodity space by market cap. This page describes it. Last week’s decline owes something to precious metal stocks and for those and coal stocks, I am looking eventually for relative buy opportunities. So there is a contradiction here and I will pass up on the trade.

Weekly RSI divergences form on sector charts

S&P Biotechnology Index

Dow Jones US Home Construction Index

S&P Media Index

These charts have daily RSI divergences to some extent, within these peaks or against their October 2012 peaks.

The weekly RSI divergences are supported by MACD divergences and having many sectors with bearish divergences strengthens the case for a market pullback.