Positive retail sales figures for June released this week showed that American consumers are still spending (up 0.2% month-over-month)…

They’re just being more circumspect about where their dollars are going.

That consumer resilience has been borne out by the price action of the SPDR S&P Retail ETF (XRT).

In the face of rising interest rates and multi-decade-high inflation, XRT has traded in a sideways pattern for nearly a year.

Yet XRT recently rose 20% off its June 1 low.

So today I want to see if it can extend its developing rally…

The Emerging Rally

The 50-day Moving Average (MA, blue line) in the chart below shows that XRT is in a broad sideways pattern.

The 10-day MA (red line) has crossed the 50-day MA numerous times, though. That reflects the swings within this overall sideways trend.

SPDR S&P Retail ETF (XRT)

Source: eSignal

When we last checked in on XRT (red arrow) in early June, it had just bounced out of oversold territory and was in the emerging stages of a rally.

As we noted at the time, this was a repeat of a recurring pattern (red circles)…

When the Relative Strength Index (RSI) makes a ‘V’ or double ‘V’ out of oversold territory (lower grey dashed line), XRT also rallies.

But there was a key distinction as to what happened after that…

If the RSI broke through resistance (green line) and got a firm footing in its upper range, then XRT’s rally would continue.

This happened up to XRT’s major peaks at ‘A’ and ‘B’ and its minor peak at ‘a’…

However, when the RSI was unable to break through – like when the RSI rallied from oversold territory in March – XRT’s rally faded.

In fact, after rebounding lower off resistance and getting stuck in its lower band from April through June, XRT instead continued to slide…

Take another look:

SPDR S&P Retail ETF (XRT)

Source: eSignal

Only when the RSI rallied from oversold territory in June (right red circle) did XRT’s down move change into an uptrend.

This time, the RSI broke through resistance, propelling XRT higher.

Adding to the bullish sentiment, the 10-day MA also broke higher. It is accelerating above the 50-day MA.

So with XRT’s rally looking promising, what am I looking for next?

Watch Out for Overheating

For XRT’s rally to develop further, we’ll want to see the RSI remain in the upper half of its range.

This pattern helped drive XRT’s rallies up to its previous peaks.

However, we need to watch out for any signs that XRT is overheating and in danger of retracing.

We saw this when XRT reversed at ‘A’ and ‘B.’ The RSI formed an inverse ‘V’ (orange circles) and tracked lower from overbought territory (upper grey dashed line).

The other thing we’ll need to monitor is our two MAs.

After each of the peaks at ‘A,’ ‘a,’ and ‘B,’ XRT reversed sharply.

The 10-day MA rolling over and dropping quickly will also warn us of any growing retracement.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Mailbag

One new subscriber shared his thoughts about getting started with spread trading in The S&P Trader. To learn more about how to join us, simply go right here.

Hey Larry, it was a very good week. I am a new subscriber with about 3 weeks under my belt. I am an old guy, and the learning curve is truly steep. But I think I’ve found a home and look forward to reaching my first goal of 2 contracts per trade. I am conservative with trading, so that will take some time, but I’ll get there.

One observation: I have seen with other programs in years past and see the same with S&P Trader that summaries reflect perfect conditions for entry. For example, I did not fill on one of the contracts on 7/12. Had I been sitting at my computer, I no doubt would have made that trade. I did not always get the entry that the summary reflects for the same reason. I am not complaining. I am just saying that not quite reaching the results shown in the summaries is not a reason to get discouraged. It is normal.

– Denham S.

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