The Consumer Discretionary Select Sector ETF (XLY) burst out of the gates at the start of the year and rallied 24% in a month.
And after a pullback, XLY slowly began climbing higher again in mid-March.
That rally accelerated mid-year as the AI boom took hold. (Tech heavyweights Amazon and Tesla dominate XLY’s holdings – around 42% combined.)
But after peaking on July 19, XLY began drifting.
And a promising counter-rally in August even petered out at a lower high.
So with XLY now trying to rally again, let’s check how things might play out from here…
Momentum Reversed
The 50-day moving average (MA, blue line) in the chart below shows XLY’s uptrend at the start of the year.
After a brief pullback, XLY bottomed out in March. It then started to climb steadily:
Consumer Discretionary Select Sector ETF (XLY)
Source: e-Signal
XLY’s rally accelerated in June along with two bullish technical signals:
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The 10-day MA (red line) began breaking above the 50-day MA (after crossing below it back in April). And both MAs moved higher.
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The relative strength index (RSI) tracked in the upper half of its range (above the green line). That showed positive buying momentum.
But a diverging pattern between the RSI and stock price led to XLY’s peak and reversal on July 19 at “A.”
XLY was making higher highs (upper orange line) while the RSI was trending lower from overbought territory (lower orange line). This indicates declining momentum.
When these two diverge, a change of direction is often in the cards.
And that is what we saw.
XLY’s emerging downtrend gathered speed. And the RSI fell through support into the bottom half of its range.
Then XLY tried to resume its previous uptrend in August. And the RSI formed a “V” and rallied from near-oversold territory (lower gray dashed line).
But a reversal in momentum (RSI) saw XLY top out and reverse at a lower high (“B”).
Take another look:
Consumer Discretionary Select Sector ETF (XLY)
Source: e-Signal
From there, XLY fell further. And the 10-day MA crossed below the 50-day MA with both MAs tracking lower.
That coincided with the RSI falling into the lower half of its range.
Yet now the RSI is rallying from oversold territory again. It recently broke up through resistance. So what can we expect from here?
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Clear Break Higher
We know that momentum is a key driver of any rally. And that’s what I’ll be watching.
When XLY rallied in August, the RSI initially broke up through resistance. But it didn’t stay in its upper band for long.
And that’s why the rally failed.
The RSI recently tested and held support (orange circle). But for XLY’s promising rally to continue, it will need to keep tracking in its upper band.
The other thing I’ll keep a close watch on is our MAs.
XLY’s stock price has recently been peppering the 50-day MA but has yet to clearly break higher.
And if the 10-day MA can rise above the 50-day MA and accelerate higher, then XLY could trade back up around $165–170.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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