The Health Care sector has been one of the strongest performers during the bull market that began in 2009. Being that it provided consistent relative outperformance while also holding a title as a defensive sector gave many investors an increase in confidence in having exposure to this space inside their portfolios. However, recently the performance for health care has begun to decline – notably due to the weakness experienced in the biotech industry.
Below is a weekly chart of the Health Care Select SPDR ETF ($XLV) going back to mid-2009. The setup here is quite simple… In 2010 and 2011 when the equity market as a whole sold-off $XLV found support at its 100-week Moving Average. Currently we have price back to this previously important level of support. Because this is a weekly chart I’m more concerned with where we close on Friday than I am with intra-week price movement.
Each of the prior declines in the Health Care sector were preceded by a bearish divergence in momentum as shown by the dotted lines on the Relative Strength Index (RSI). The selling wasn’t strong enough to push the RSI indicator into ‘oversold’ territory, in fact both instances saw the indicator bottom out around 34. Once again we saw this summer a bearish divergence created as $XLV put in a higher high in price while momentum setup a lower high. Momentum is now back to the level that saw price bottom out in ’10 and ’11, will the same type of bounce occur here?
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