Personal consumption massively influences the health of the economy and markets, accounting for 70% of gross domestic product (GDP).

Because of the five rate hikes we’ve already had this year consumers have come under increasing pressure. And last week’s 8.2% consumer price index (CPI) report means there’s little chance of that pain abating anytime soon…

Basics like food and rent are still going through the roof, and it’s increasingly likely that the Fed is going to hike rates twice more before the year is out.

So today I want to check out a major part of consumer spending by looking at the Consumer Staples Select Sector SPDR Fund (XLP).

XLP is trading around its yearly lows… but it’s also showing increased buying momentum. So let’s see what’s coming next…

Tradeable Patterns

The chart below shows that after peaking in April (A), XLP has gradually been trending lower…

The 50-day moving average (MA – blue line) rolled over and began tracking lower in June, with XLP making a lower high in August (B).

Take a look…

Consumer Staples Select Sector SPDR Fund (XLP)

Source: eSignal

As you can see, within this broader pattern, there’ve been plenty of major countermoves…

XLP rallied from March through April, and from June to August – adding multiple smaller countermoves along the way.

With so many swings, some might put a chart like this in the “too hard” basket.

However, it can offer us plenty of trading opportunities. You just need to work out how to trade it…

When we looked at XLP on September 19 (red arrow on the chart), we saw two clearly identifiable and tradeable patterns…

1. When the Relative Strength Index (RSI) forms a ‘V’ at or near oversold territory (lower grey dashed line) and bounces, XLP rallies higher (red circles).

2. And when the RSI forms an inverse ‘V’ in overbought territory (upper grey dashed line) and reverses, XLP rolls over and falls lower.

This reversal pattern from both overbought and oversold territories created trading opportunities in both directions.

Most recently, the RSI has formed multiple ‘V’ moves as it trends higher (red line in the lower right of the chart).

Consumer Staples Select Sector SPDR Fund (XLP)

Source: eSignal

That action has now put the RSI right up around resistance (green line). What happens here will be key to XLP’s next move.

So what am I looking for around here?

The Current Pattern Is Key

Another recurring RSI pattern is its action around this resistance level…

When XLP made those major moves higher in March and June, the RSI broke up through resistance and gained traction in the upper half of its range in both cases.

(And although today’s chart doesn’t show it, it was the same story for XLP’s rally into the end of 2021.)

In the June move, the RSI tracked right on top of the resistance line before eventually breaking higher, which then pushed XLP higher.

However, in all the other moves, the RSI petered out right on resistance.

That’s why the RSI’s current pattern is key to where XLP goes next…

If the RSI can again break into the upper half of its range and stay there, then XLP’s recent move off its lows could also gain momentum. The longer the RSI stays in its upper band, the bigger that move could become.

The next test would then be for the 10-day MA to break back above the 50-day MA.

However, if the RSI fails to break through resistance and instead rolls over, then any bounce in XLP will be short lived.

With today’s adverse economic climate, we’ll keep a close eye on where consumer staples are heading.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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