Retail sales benefited enormously from low interest rates. Consumers everywhere went on an unprecedented spending spree.

However, with the Fed reining in inflation with rapid rate hikes, that era of cheap money has come to an end.

Having quadrupled from the start of March 2020, the SPDR S&P Retail ETF (XRT) spent the first half of 2022 giving back a lot of those gains.

By the time XRT bottomed out, it had dropped around 48% since its November 2021 peak.

When we last looked at XRT in December (red arrow in the chart below), we saw how XRT spent the rest of 2022 trading in a sideways pattern after its sharp fall.

Each rally within that sideways pattern petered out, with XRT rolling over and falling back to support.

So now, with XRT trying to rally off that same level for a third time, I want to see what’s coming next…

Previous Patterns Repeating

The chart of XRT below shows its clear downtrend in the first half of 2022…

Throughout this period, the long-term 50-day moving average (MA – blue line) fell steadily. The Relative Strength Index (RSI) bearishly remained in the bottom half of its range (below the green line).

SPDR S&P Retail ETF (XRT)

Source: eSignal

Yet around mid-June, XRT’s pattern started to change…

Back then, XRT re-tested its May low… and held. That helped establish XRT’s long-term support level (the orange line).

The 50-day MA started to flatten out… Then in July, XRT tried the first of its rallies off support.

That move coincided with two key technical signals…

1. The RSI bullishly broke up through resistance and into the upper half of its range.

2. The 10-day MA (red line) broke back above the 50-day MA.

However, that move peaked and quickly reversed (1) when the RSI formed an inverse ‘V’ from overbought territory (upper grey dashed line) and then headed sharply lower.

Then, after lingering along support throughout September and October, XRT again rallied higher with a repeat of the same signals from the first rally.

Take another look…

SPDR S&P Retail ETF (XRT)

Source: eSignal

This time, XRT’s rally petered out (2) as buying momentum evaporated. The RSI broke down through support, while XRT retested (and held) its long-term support.

From there, the RSI formed a ‘V’ in oversold territory (red circle). And XRT’s third rally got underway.

So now that this rally has taken out its previous high at ‘2,’ what am I expecting from here?

Pushing Into Overbought Territory

Just like its two previous rallies, XRT’s current rally started to gain traction when the RSI broke into the upper half of its range.

That increase in buying momentum helped propel XRT to take out its previous high at ‘2’.

As you can see, though, the RSI is now pushing right up against overbought territory…

If the RSI can track along here without a sharp reversal, then the bigger XRT’s potential rally could be. For that rally to develop, we’ll also need to see the 10-day MA accelerate above the 50-day MA.

But it’s not yet clear whether the third time will be the charm for XRT…

Ultimately, action around the RSI’s overbought territory will be key… If the RSI reverses sharply like it did at ‘1,’ then XRT’s attempt at a third rally will also likely come to an end…

From there, a strong move lower from the RSI could also set XRT up for a quick pullback. That would provide nimble traders with the setup for a potential short trade.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

In today’s mailbag, a Trading With Larry Benedict reader sent in their thoughts…

Thank you for your honesty and integrity. You’re not sugar coating the true facts. This was refreshing.

– Douglas F.

Thanks for sending in your thoughts! If you have any questions or comments, then you can always send them to feedback@opportunistictrader.com.