This Extended Up Move Will Likely End in Disappointment

On November 15, we saw a strong market transition out of “Big Tech” into industrial stocks such as the Industrial Select Sector SPDR ETF (XLI).

In less than a month, XLI had rallied 21% from its October low. This rapid move higher put XLI in danger of overheating…

However, after a brief pullback, XLI rallied even higher.

But now buying momentum is weakening, and XLI looks vulnerable again. So today we’ll see what’s in store from here…

Rallies Petering Out

On the chart below, XLI’s series of lower highs (A, B, and C) shows a common bear pattern.

Each countertrend rally petered out below the previous high before rolling over and heading lower again.

Check out the chart…

Industrial Select Sector SPDR ETF (XLI)

Source: eSignal

Within this long-term downtrend, you’ll also notice the action of our two moving averages (MAs)…

After each of those peaks at A, B, and C, the 10-day MA (red line) bearishly crossed below the 50-day MA (blue line), confirming XLI’s next leg down.

The 10-day MA tracked below the 50-day MA until the next major countertrend took hold.

Each countertrend rally coincided with the Relative Strength Index (RSI) forming a ‘V’ out of oversold territory (lower grey dashed line).

When the RSI made a double ‘V’ (red circle), XLI was able to form a base for its current rally around its yearly low.

Then, as the RSI broke up through resistance and gained traction in the upper half of its range, XLI’s rally continued.

When we last checked XLI in November (red arrow), the rally had pushed the RSI into overbought territory (upper grey dashed line).

Take another look below…

Industrial Select Sector SPDR ETF (XLI)

Source: eSignal

I was watching out for the previous pattern at ‘C’ to repeat. If the RSI formed another inverse ‘V’ out of overbought territory – and then retraced lower – XLI would’ve rolled over.

But XLI continued to make higher highs while the RSI see-sawed along the overbought line. I knew a change of direction was likely after the RSI and stock price began to diverge (orange lines).

So what can we expect from here?

This Down Move Could Accelerate

Recently, the RSI fell further below the orange line. At the same time, XLI broke below $100.

Now, the RSI is tracking back down close to support. So what happens around this level is key…

For XLI to have any chance of resuming its up move, it’ll first need to hold this support. The next test would be for XLI to take out its December 2 high of $102.69.

However, if the RSI breaks support and gets stuck in its lower range, then we can expect this emerging down move to accelerate.

I’ll also be watching our two MAs…

If the 10-day MA reverses and starts converging toward the 50-day MA, then that’ll add further confirmation of XLI’s down move.

And that could set us up for a potential short trade.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

P.S. Thank you to everyone who joined me last night at my 750% Boost briefing. There, I shared how we can get a 750% better yield on our cash and generate income on a regular basis… rather than watching inflation eat into our buying power.

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Reader Mailbag

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I would like to genuinely apologize to the staff for not acknowledging them as well. Your generosity and kindness has given One Ticker Trader the success we enjoy.

At $19.99, your work may go unappreciated. But I’m one trader who very much acknowledges and appreciates each one of you – and your families who support you.

Thank you to all of you and your families. May God bless every one of you with health, prosperity, and a safe holiday season into the new year. I wish you all a very Merry Christmas.

– Walter S.

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