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Technician: The bulls need to avoid this temptation

A very important technical level may be warning investors to stay away from some potentially dangerous sectors.

As stocks have regained some of their steep losses this year, several of the most beaten-down sectors have led the recent rally. The energy, materials and financial sectors have all risen more than 4 percent in one week. However, technician Ari Wald of Oppenheimer warns not to be fooled by their relative strength.

"I think you still want to have a very selective approach here," Wald said Wednesday on CNBC's "Trading Nation." "If you look at how the average stock has performed ... that has broken down by a significant degree."

Broadly speaking, stocks have broken below their October 2014 low, according to the Value Line Arithmetic Index, a measure of average stock performance based on 1,700 stocks.


More specifically, Wald said the breakdown has made him more cautious on value-based sectors such as energy, materials and financials. These three sectors have the highest percentage of stocks below the October 2014 low, Wald said.

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"These are sectors with less support, more resistance and a more unfavorable risk-reward," he said. "At best they're sideways, more likely they're the areas to drag us lower."


Wald said these three sectors should continue to be dragged down by low commodities prices and low-interest rates. On the flip side, Larry McDonald of the Bear Traps Report said the prospect of low-interest rates should send investors into defensive sectors such as utilities.

Bond yields have tumbled amid a flight to safety this year, with the 10-year Treasury note yield dropping to 1.85 percent as prices have risen. Meanwhile, the S&P utilities sector has been one of the year's best performers, rising 6 percent year to date.

"If the 10-year [yield] gets back down below 1.5 [percent], the interest-rate sensitive equities are going to outperform many other sectors of the market," McDonald said Wednesday.

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Brian Sullivan is co-anchor of CNBC's "Power Lunch" (M-F,1PM-3PM ET), one of the network's longest running programs, as well as the host of the daily investing program "Trading Nation." He is also a frequent guest on MSNBC's "Morning Joe" and other NBC properties.

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