When the Fed flooded the economy with cheap money during COVID, retail sales enjoyed tremendous growth.

From its March 2020 low to its November 2021 high, the SPDR S&P Retail ETF (XRT) quadrupled in price – a gigantic move for an individual stock, let alone a sector.

But as the Fed cut that stimulus this year, XRT has come under pressure. From its November peak to its July lows, XRT lost almost half its value.

After establishing support, XRT briefly rallied higher. But that rally quickly ran out of steam. XRT rolled over and is now testing its yearly lows once again.

So today, we’ll examine what’s in store for this highly watched sector…

The Rally Flamed Out

After peaking in November 2021, XRT’s downtrend kicked off when the Relative Strength Index (RSI) reversed from overbought territory (upper grey dashed line).

Soon after, the 10-day moving average (MA – red line) crossed down below the 50-day MA (blue line) in December, confirming the down move…

SPDR S&P Retail ETF (XRT)

Source: eSignal

Apart from a brief period in late March, the 10-day MA bearishly tracked below the 50-day MA throughout the move.

After falling through support, the RSI also traded in the lower half of its range (below the green line) – another bearish signal.

However, as the RSI started to make a series of higher lows (red line) in the bottom half of the chart, XRT was able to form a base (orange line).

Then, in July, XRT began rallying. The RSI broke up through resistance and tracked in the upper half of its band.

And the 10-day MA crossed back above the 50-day MA, which added further confirmation of the emerging uptrend.

But when we last looked at XRT on August 23 (red arrow), that rally was in the process of flaming out…

The RSI formed an inverse ‘V’ from overbought territory and retraced lower. XRT rolled over and started heading lower.

Take another look…

SPDR S&P Retail ETF (XRT)

Source: eSignal

This down move gained momentum from two common bear signals…

1. The RSI broke back below support into its lower band.

2. The 10-day MA crossed below the 50-day MA and began to accelerate lower.

That action now puts XRT right back at a key support level. And what happens around here will be key.

So how do I see things playing out?

Tough Challenge Ahead

The longer a support (or resistance) level holds, the stronger that level grows… and the bigger deal it becomes when that level fails.

Right now, XRT is trading right in the middle of that zone.

Recently, the RSI has formed a double ‘V’ near oversold territory (lower grey dashed line) and is closing in on resistance.

This upward momentum is enabling XRT to currently hold support.

If the RSI can break up through resistance and gain traction in the upper half of its band, XRT could then rally off this support level. That would provide the setup for a potential long trade.

However, if the RSI is unable to break through resistance – and instead gets stuck in the lower half of its band – then holding support will become a much tougher challenge.

If XRT breaks below support, we can expect a gloomy outlook… especially if the RSI remains in its lower range. In that scenario, the chart would set up XRT for another leg down.

For now, I’ll be keeping a close eye on XRT. Its future direction will show us whether it’ll provide a strong trade opportunity or if it’ll continue to have a tough road ahead.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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