Just one sector in up trend mode and outperforming the overall market:
Forestry and paper

Four sectors in down trend mode and under performing the overall market
Alternative energy
Food producers
Support services
Travel and leisure

One sector passes all 5 tests for a down trend and has under performed the overall market by more than 5% over the last 3 months:
Food producers.

Eight sectors pass all 5 tests for an up trend and have out performed the overall market by more than 5% over the last 3 months:
Automobiles
Banks
Chemicals
Electronics and electrical equipment
Forestry and paper
Industrial metals
Life insurance
Non life insurance
Oil equipment.

There is just one sector this week where we have a bearish bias, with the sector passing 5 tests for a down trend and also underperforming the overall market by 5% or more:
Healthcare

There are 6 sectors where we have a bullish bias, with the sectors passing 5 tests for an up trend and also outperforming the overall market by 5% or more:
Chemicals
Electronic & electrical equipment
Forestry and paper
General industrials
Non life insurance
Technology hardware.

The recent more bullish price action in the overall market has generated no less than 14 sectors (out of 39) which pass the five tests for an up trend and which have also outperformed the overall market by at least 5% over the last three months.

Meanwhile, there are 2 sectors which pass the tests for a down trend and which have also under performed the overall market by at least 5% over the last three months.

Up trends:
Automobiles
Chemicals
Electricity
Electronics and electrical equipment
Food producers
General industrials
Industrial engineering
Mobile telecoms
Non life insurance
Oil equipment
Personal goods
Pharmaceuticals
Technology
Tobacco

Down trends:
Alternative energy
Health care

Sectors which have outperformed the overall market by 5% or more over the last 3 months, and which are trending up using 5 different tests are:
Fixed line telecommunications
Personal goods
Technolology hardware

Sectors which have under performed the overall market by 5% or more over the last 3 months, and which are trending down using 5 different tests are:
Oil producers
Real estate investments and services

After preparing the weekly sector analysis every week I also prepare for myself a list of stocks which are in sectors which pass the tests and which also themselves pass the tests.

During the week, I reduce the lists of sectors and stocks if they fail any of five of the six tests (I dont make mid week amendments for relative strength against the market, but all five of the other tests are checked on a daily basis).

In most weeks the changes are not that dramatic, however the tests are quite responsive to new events, in particular the 3 - line break charts.

Based on Tuesday's falls the number of sectors where I still have a long bias has been reduced from 10 out of 39 to just 7 out of 39; and the number of stocks on the list has been reduced from 49 to 34.

This sector analysis directs me to outperforming and up trending stocks in bull markets, under performing and down trending stocks in bear markets. In sideways markets it will start to reduce the number of sectors in focus. For it to signal short trades some of the sectors will need to fall below their 200 day moving average, since the analysis always respect that - it will never have a short bias in a sector above its 200 day moving average.

The sectors which have survived the down blast so far are:
Beverages
General Industrials
Industrial engineering
Media
Support services
Technology
Travel and leisure

Here is the weekly update on long and short bias in the FTSE 350 sectors.

Summary: long bias 15 sectors out of 39, short bias 1, neutral 23

Long bias:
Automobiles
Chemicals
Electronic and electrical equipment
Forestry and paper
General industrials
Industrial engineering
Industrial metals
Industrial transportation
Media
Mining
Oil equipmment
Personal goods
Software
Technology hardware
Travel and leisure

Short bias:
Alternative energy

For the paramaters of this filter, see earlier blogs.

Sectors where I have a short bias: Alternative energy

Sectors where I have a long bias: Aerospace and defence; Chemicals; Construction; Electronic and electrical equipment; Forestry and paper; Health care; Industrial engineering; Industrial metals; Mining; Personal goods; Software; Technology hardware; Tobacco; Travel and leisure

There are a total of 39 sectors, short bias 1, long bias 14; neutral 24

Feedback is that people find this analysis useful, so I will continue to publish it - I use it as a filter for my own trading.

Just a quick reminder of the criteria for the analysis:
to have a long bias in a sector the sector needs to pass 5 tests:
relative strength >5% versus market; price above 200 day moving average; Kagi in Yang mode (bullish); 3 line break chart in up trend; 13-26-52 moving average combo in up trend

To have a short bias in a sector the sector needs to pass 5 tests:
relative strength <5% versus market; price below 200 day moving average; Kagi in Jin mode (bearish); 3 line break chart in down trend; 13-26-52 moving average combo in down trend

There are 40 sectors in total - I am neutral on 23.

Bullish bias on twelve: Aerospace and defence; Chemicals; Electronic & electrical equipment; Food producers; Forestry and paper; Health care; Industrial engineering; Industrial metals; Non life insurance; Personal goods; Tobacco; Travel & Leisure

Bearish bias on five: Alternative energy; Financial services; Fixed line telecoms; General retailers; Real estate investment trusts

Just to clarify if I am trading UK stocks I wont look at any in the neutral sectors. To go long both the sector and the stock itself has to pass the five tests for bullish bias; to go short both the sector and the stock itself has to pass the five tests for bearish bias

Whatever direction (if any) the overall stock market is going in there can always be trends either in the same or the opposite direction when you look at the sectors within the market.

Each week I like to get an overview of how these sectors are performing.

For instance, this weekend I used the following criteria in an analysis.

For outperforming sectors still in an uptrend:
sector out performance over the last 3 months over 5%
Kagi 2% in Yang mode
sector index over the 200 day moving average
13-26-52 moving average combination in up trend mode.

The following sectors passed this test:
Electricity; Technology; Tobacco; Travel and Leisure.

For underperforming sectors in a down trend:
sector under performance over the last 3 months greater than 5%
Kagi 2% in Yin mode
sector index below the 200 day moving average
13-26-52 moving average combination in down trend mode

The following sectors passed this test:
Alternative Energy; Banks; Financial Services; General Retailers.

Any overnight trades I look for will respect this analysis, so for instance I would not look to go long any General Retailer stock, I would only look to go short in that sector.

When looking at the FTSE 100 price action it is also interesting to see how the FTSE 250 has been behaving. The FTSE 250 like the 100 was in a powerful up trend, with higher highs and higher lows; but whereas the 100 reached a peak and then went into consolidation on 16 November, the 250 peaked earlier, reaching a high of 9591 on 15 October, before entering a period of consolidation. The price action of the 250 during this consolidation also has a triangular appearance, with lower highs and higher lows, however unlike the 100 the 250 has yet to break out of its consolidation. It is quite close to a trend line drawn across the peaks of the consolidation, however a break up has not yet occurred.

The FTSE 250 contains the next 250 stocks after the FTSE 100 in capitalisation, ie those ranking 101 to 350, which include more volatile and riskier investment vehicles, so the failure to break out to date suggests that some investors have started to lose their enthusiasm for the more risky assets. Whether or not the 250 does break out is a further piece of evidence for assessing the robustness of the 100 break out.

It isnt always this way, but right now my belief is that the S&P 500 is the lead index to watch. Whatever goes on there will in my view dictate the price action of the FTSE 100 and 250.

So just as we have seen a significant pull back in the S&P 500, based on an important resistance level at 1100, so we have seen pull backs in FTSE 100 and 250.

The key resistance levels in those two indices are around 5300 and 9600 respectively.

One difference is that while we are waiting to see if the S&P 500 penetrates the low of its previous pull back, the FTSE 250 has already done so, and has fallen further than the S&P 500. The FTSE 100 is still waiting for that all important test of the low of previous pull back, and it lies at 4955. Around that level (4920 to 4940) is also a former resistance area, and on the basis that former reistance should act as support, a breach of this level would be a serious blow for the bulls.

On 15 June the high of the day was lower than the low of the previous day. In Western technical analysis this is called a gap. In Japanese candle stick terminology it is called a window. Windows are either rising, if above the previous day, or falling is as in this case below the previous day.

The theory is that a falling window will tend to act as resistance on a closing basis, until filled, that is until price closes above the window.

The 15 June window is between 4394 and 4427. The high of last Friday, 17th July, was 4412, and the price action formed a doji, a sign of hesitation at the end of the week's up move. The 15 June window is now a key area of resistance for the index. For the up move to continue price will need to close above 4427.

We have seen the FTSE 100 in a narrow trading range, within a large trading range, since early May. The top of the narrow range is around 4521, the bottom around 4295.

Last week the index penetrated the lower barrier for a few days, but then moved back up again above 4295 on Friday on above average volume.

This could be a feint, what has been called by various analysts over the years a fake out or a spring, catching out all those traders going short on the penetration, and heralding a new move up.

But many break downs from a consolidation area see a last gasp pullback into the consolidation, before the break down starts in earnest.

The market should may tip its hand more clearly next week.

In volatile times it is sometimes useful to be able to step back and get a little perspective. The Japanese technique of Kagi charts is not dissimilar to the century old Western technique of point and figure. If your charting package has these Kagi charts I would recommend trying them out. The main variable for the user to input is the percentage of price movement required to get a line on the Kagi chart to change direction. For indices 1% gives a good view of the short to intermediate term, and for a longer perspective I use 3%, for a very long perspective 5%.

The Kagi charts are very good at showing major support and resistance levels, also significant consolidation areas.

The 1% Kagi charts of the FTSE100 show clearly that most of the price action since October 2008 has been in a wide range running from 3850 to 4400,  with two excursions above the range and two below (one in November and once just recently). Every excursion above and below this range has ended up with price eventually being pulled back into the range, almost like a magnet. Other charts show that both the excursions and the returns to the range tend to be volatile as both the bulls and the bears start to form strong and differing views on where price is ultimately heading.

The FTSE250 is range bound (again a wide and volatile range) with most of the price action since October falling between 5680 and 6780.

The S&P is now back in its former range of 800 to 940, after a violent luch down below this range and a fast and furious move back up into it. Many eyes are on this chart. On the Kagi chart there is now an important support level created in this most recent move up, around 768, and optimistic bulls will want to see that support level kept in tact.

Since mid October the FTSE 100 has in effect been in a very wide trading range, and we have seen high volatility as it traverses the range. The two high points of the range are close - 4640 (4 November) and 4676 (6 January) At the bottom end of the range it is a little more complicated, with several layers of support. The highest level of support is represented by the lows of three days - 3973 (2 December) 4002 (5 December) and 3957 (23 January). The candle on 23 January has  a long tail, showing that the bulls took the upper hand by the end of the day, and this has followed through on 26 January with the index managing to climb back above 4200. This was a successful test of the top level of support. There are various other levels of support below here, all the way down to the low of the trading range which is at 3665.

What we have seen in recent days is an acceleration down to the top level of support, and this has caused the ADX indicators to register nascent downtrends. The faster 8 day ADX reached 35 by the end of last week,and was rising with -DI above +DI. The standard 14 day ADX got to 18, again rising with -DI above +DI (so didnt reach the cut off point of 25).

If the upper level of support continues to hold we can expect this nascent downtrend to fizzle out.

There is a similar picture (in my view) in both the FTSE250 and the S&P500.

By request here is confirmation of where we currently stand on the six scenarios previously identified for the FTSE 100.

For convenience the original text for the first three scenarios is reproduced.

Scenario 1 Those that look for such things are able to identify a massive head and shoulders pattern over the last couple of years. One calculation of the related target is 3927, which has already been achieved. Scenario 1 says we are near the lows already. But these geometric patterns often overshoot their targets. The pattern did indeed overshoot, to a low of 3665.

Scenario 2

Looking at the transition from bear to bull market in early 2003 there are several weekly pivot lows just above the 3600 mark. Going all the way back to 1998 these levels offered support then. The range is roughly 3610 to 3640. Scenario 2 says these levels will halt the decline. These weekly pivot lows are in play. The support levels are still in place. The low of the recent move (3665) did not penetrate these support levels. We are now more than a fortnight past that low. It is possible that the low will be tested again. Then we need to see if the old support levels still hold.

Scenario 3

The lowest weekly close of the previous bear market was 3467. Scenario 3 says we are going there. This is the next lower level of importance if Scenario 2 breaks down

What is ADX telling us about the FTSE 100?

1)      Let’s first look at ADX with the standard 14 day setting. As of close of play Tuesday 11th, –DI was still above +DI;  +DI did cross briefly above – DI on 4th and 5th November, but quickly slid back down below it again. Generally, in down trends –DI is higher than +DI, in up trends +DI is higher than –DI. In sideways markets these two lines often criss cross over each other. The current configuration is still as for a down trend, however if we start to see the DI lines criss cross this would suggest a sideways market. Remember however just like moving averages both ADX and its two DI lines are both lagging indicators, so can be a little late with their signals.

2)      One of the traditional signals with ADX is a turn down in ADX from a high level, signifying a reduction in the power of the trend – this can lead either to a consolidation or sometimes to a reversal of the trend. The 14 day ADX reached the level of 40 on 28th October, but has been declining since, signalling an abatement of the power of the downtrend

3)      A key cut off level for the ADX indicator is 25 – this level is often used to distinguish between a trend and a range bound market. As of close of play Tuesday 11th the ADX indicator fell below 25 for the first time since early October, signalling a move into a range bound market

4)      Now turning to ADX with an 8 day setting, the patterns we have already looked at with the 14 day setting are all in place, but they are started showing up in the indicator earlier. The ADX indicator peaked at 52 on 17th October, and then started falling, moving below 25 on 7th November, The first crossing of +DI over –DI occurred on 30th October, and the two lines have been criss crossing since, signalling a range bound market.

Looking at the evidence of both the 14 and the 8 day settings ADX is suggesting we have now transitioned from a down trend to a range bound market. From this point obviously it could either way. The range bound market could lead to a renewed down trend, or it could provide a platform or base from which a new up trend could emerge. In a range bound market we need to start to clarify the major support and resistance levels, and then take our cue from a break of those support and resistance levels.

On 19th September the index had a record rise in one day, closing over 430 points up on the previous day, on higher than average volume.

Perhaps it was obvious, but one week on from then the index seems to have had a little difficulty digesting that rise.

The chart has a "wait and see" look about it, as the world waits and sees whether or not the much hyped rescue plan for ailing US financial institutions actually comes to fruition.

The half way point between the low of the 18th and the high of the 19th is somewhere around 5106, and the July low was 5071. For the bulls to regain morale the index needs to keep above both those points. The weekly close on 26th September was 5089, so almost but not quite.

Monday 15th September has seen markets around in the world in turmoil, following the failure over the weekend to rescue Lehman Brothers. This is the biggest US investment bank to go under for eighteen years (since Drexel Burnham Lambert). Over the weekend there have also been various other major news items affecting the US financial sector, most notably another major US investment bank, Merrill Lynch, agreeing to merge with Bank of America.

At one point during morning trading the FTSE 100 was down over 5%.

A key question here is: will this lead to a renewed downtrend for the index? Recent months price action has looked like a large and volatile trading range. Is this about to change?

Key levels of support, based on weekly pivots, have all been breached bar one:

January low 5339;
March low 5414;
August low 5261;
w/e 5 September low 5228.

That just leaves the July low, 5071.

There is a lot riding on whether that July low holds. If it does that could put in place some sort of bottom, if it is breached we could see panic selling.

A weekly low with two higher lows either side of it tends to be an important battleground for the bulls and the bears; equally a weekly high with two lower highs either side of it.

The low of the week ending 1st August was 5261, lower than the low of the week before and the week after, and therefore a critical area for the bulls to defend. In the week ending 22nd August price was pushed down towards this point, but at the low point in the week of 5311 there was a massive push back up by the bulls, trouncing the bears, and by the end of the week the index closed at 5506.

The next major battleground is now 5569, where the high of the week ending 15th August has two lower highs either side of it. This is a point which the bulls must penetrate to maintain the pattern of higher lows and higher highs as the large May to July down move is retraced.

The bears can point out that the fall from the May high of 6377 to the July low of 5071 was a hefty 1306 points, and so far the recovery has got nowhere near the halfway point of 5724. Fibonacci fans might add that the 38% recovery level is around 5570, and guess where the recovery stopped on August 12th.... The bears would expect some sort of recovery to those levels before renewed selling takes the index back down to at least test the July low.

The bulls can point to a longer term support level which is just about holding, the January low of 5339, although it would be more encouraging if the higher support level at the March low of 5414 also held. Since the July low of 5071 a higher low was recorded in the week ending 1st August, at 5261, and in the short term this will be an important level to hold if the bulls are to mount a further recovery.

Two weeks ago we suggested the index was at the crossroads. A week ago we pointed out the doji which had formed on the weekly chart, a picture of indecision. Last week the index was still in hesitant mode, and now a second doji in a row has formed on the weekly chart. Opening at 5350 and closing at 5355 is close enough to be counted as a doji. As in the previous week the doji has long tails, the bulls at one point pushing prices up as high as 5456, the bears at one point pushing prices down as low as 5261. The close was a little above the low of the January decline of 5339, from which the bulls might draw a little comfort, but they have not really grabbed control after halting the downtrend.

Feels like this match is going into extra time...

On July 18th the FTSE100 did something it hasnt done for a while - it closed higher than the close of the previous week. That hasnt happened since mid May, since when the bears have had a field day. In addition by July 18th both the 14 day and the 8 day ADX had turned down from fairly high levels (44 and 54 respectively), a sign that the down trend is at least temporarily stalling.

Finally, for those that set store by Japanese candlesticks the price action last week formed a hammer, a bullish pattern; this particular hammer has a long tail and was accompanied by above average volume, potentially cheering the bulls even more. Offsetting these bullish factors, both the 14 day and the 8 day ADX have been forming a pattern of higher highs throughout the recent downtrend, highlighting the power of the trend, and to date there has been no sign of any divergence in the indicator.

If the bulls are to turn things around there are a couple of reasons why this might be an appropriate point. First, for those that think bear markets should retrace about half of the previous bull markets gains, we got close to that last week. From the March 2003 low (3278) to the high of the bull market in July 2007 (6754) the index gained 3476 points. Last week's low of 5071 was 1683 points off the high, which represents 48% of 3476.

Second, during last week the index took out the low of the January 2008 hammer on the weekly chart (5339) which offers potential support, but by the end of the week closed above that low. That support held, in the end.

The index is at the crossroads. The bulls are in the spotlight. What they need is to hold on at all costs to the low of last weeks hammer (5071) and ideally also the low of January's hammer (5339). Then they also need to break the trend line drawn above the highs from mid May to now. ADX followers will also be looking for +DI to cross over the DI line.

If the bulls attempt all of this and fail, then the bears will be back in charge.