The Fed’s 0.75% rate rise last month marked the fifth rate rise in 2022.

It also puts the Fed Fund’s rate a full 300-basis points (or 3%) higher than at the start of the year and its highest level since January 2008.

Given its sensitivity to interest rates, this rate rise cycle has been devastating for the consumer discretionary sector.

From its January high to its June low, the Consumer Discretionary Select Sector ETF (XLY) dropped a whopping 37%.

But, when we last looked at XLY it had rallied strongly off those lows. Then, after a pullback, was showing promising signs that the rally was regathering steam.

However, with that rally petering out and XLY rolling over… today I’m going to discuss what I see coming next…

A Tell-Tale Bearish Signal

On the chart, XLY’s downtrend began when the 50-day moving average (MA – blue line) started to track down at the start of the year.

Apart from a brief period in March and April, the 10-day MA (red line) bearishly tracked below the 50-day MA until July…

Consumer Discretionary Select Sector ETF (XLY)

Source: eSignal

The other tell-tale bearish sign is the action of the Relative Strength Index (RSI)…

Apart from that period in March-April when XLY made a lower high, the RSI remained predominantly in the lower half of its range (below the green line) throughout the entire move down.

But, as the RSI gradually began to grind higher in June and July, XLY was able to find support (orange line). Then, as the RSI broke into the upper half of its range, XLY rallied higher.

However, after the RSI topped out in overbought territory (upper grey dashed line) and then reversed, XLY rolled over and headed down.

When we looked at XLY on September 7 (red arrow), the RSI had bearishly broken back into the lower half of its range. And that’s where it has remained since then, apart from a brief period in early September.

Adding to the bearish sentiment, after tracking closely together, the 10-day MA has recently broken strongly beneath the 50-day MA.

The real question now is – with the RSI tracking near oversold territory (lower grey dashed line) and XLY closing in on support (red circle) – what can we expect from here?

Holding Support Is Crucial

Let’s take another look at the chart…

Consumer Discretionary Select Sector ETF (XLY)

Source: eSignal

The more a level is tested and holds, the stronger that level becomes. And the bigger deal it is when that level is broken.

That’s why I’ll be watching the action around the orange support line like a hawk over the coming week…

Despite testing it around a dozen times from May through July, ultimately this price level held. And it provided the base from which XLY began rallying from July through August.

If the RSI forms a decisive “V,” and XLY holds support, then that could provide the setup for a potential long trade.

However, don’t forget that when support is broken, that same price level can often turn into resistance (and vice versa).

Meaning, if XLY once again tests this level and instead crashes through, then that could set XLY up for another major leg down.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

In today’s mailbag, a One Ticker Trader member shares his experience…

I bought two contracts of your recent Quad Witching trade for $1,587. I thought we were holding until expiration and evidently missed the close trade notification, so I held until Friday. I guess dumb luck is better than no luck.

I closed the trade at $20,752 for a $19,164 gain. What can I say, but thank you, sir. Even as I apologize for not following your directions properly.

– James B.

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