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Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
Lately, I’ve been writing a lot about retail sales…
That’s because it is such an important part of the economy.
So, it’s vital to keep an eye on the sector. Any change can have a major impact on the economy.
Last Friday, we looked at two ways I gauge retail sales in reference to data. That data was released earlier this week.
The first, durable goods, beat expectations on Monday. Sales rose 1.8% compared to just 0.5% the previous month.
At first glance that seems positive… until you take a closer look.
First, that number is still around the middle of its long-term range.
And second, just one section – nondefense aircraft and parts – saw a rise of 78%. That’s enough to skew the results upward.
The other way I gauge retail sales is through the Redbook (named after the color of its original hard copy version).
Redbook sales data was released on Tuesday. That’s what I want to discuss further today.
However, let’s look beyond the pure economics… I want to see how it translates into something we can trade.
One ETF that gives a broad picture into retail sales is the SPDR S&P Retail ETF (XRT).
So, let’s pull up the chart…
XRT Price Chart
Source: eSignal
To give some backdrop, let’s first consider the recent Redbook data. Weekly retail sales rose 16.5% (year over year) – that’s right around the average over the past couple of months.
Because of that, this might not seem like anything out of the ordinary.
However, we know that this level is around three to four times its long-term average (as I mentioned in Friday’s essay).
From a trading perspective, however, this information is key…
It’s the exact sort of scenario that can potentially throw up some trading opportunities… like a mean reversion trade.
For example, if the Redbook data was to revert to its long-term average, that could prove to be a very lucrative trade (by shorting XRT).
So, let’s go back to the chart…
XRT Price Chart
As you can see, from mid-2016 through early 2020, XRT traded sideways.
Over this time, the 10-day MA (red dashed line) and the 50-day MA (blue dashed line) were never far apart.
After the drop into March 2020, however, this pattern changed dramatically. The 10-day MA burst above the 50-day MA, as the uptrend gained momentum.
As we can see now, this huge uptrend has lost momentum. The 10-day MA (red dashed line) – at one stage almost vertical – looks to have peaked and is now just rolling over.
And that’s where our regular indicator, the Relative Strength Index (RSI), helps fill in the picture.
We’ve spoken before about divergence. Divergence happens when the share price and RSI are heading in different directions. It can often mean an impending change in direction…
Well, you can see that’s occurring here with the two slanted red lines on the chart. While XRT has slowly moved higher, the RSI has fallen, showing declining momentum.
A change in direction could soon be in the cards…
Right now, it might be too early to trade.
We might first want to see the 10-day MA cross down over the 50-day MA before considering a short trade.
Rest assured, I’ll let you know if I spot a potential trade.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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