Why Consumer Discretionary Is at a Crossroads… Again

Consumer discretionary came under enormous pressure last year…

By the end of 2022, the Consumer Discretionary Select Sector ETF (XLY) had dropped around 40%.

Perhaps that’s little surprise given the huge drubbing meted out to Amazon (AMZN) and Tesla (TSLA)…

Combined, the two represent 44% of XLY’s holdings. And they fell around 50% and 70%, respectively, from their January 2022 highs.

When we last looked at XLY on November 9, it was under extreme pressure, struggling to hold support.

Although that support initially held, XLY broke lower in December. It hit its lowest level since March 2020 after the market tanked at the start of COVID.

But recently, it has rallied off its December lows. And now XLY is trading at a critical level.

So today, we’ll see what’s next for this hugely important sector…

Pushing Against Resistance

On the chart below, the 50-day Moving Average (MA – blue line) shows XLY’s dramatic fall in the first half of 2022.

XLY rallied to a lower high in August, causing the 50-day MA to counter-rally. But it spent the rest of 2022 trending down…

Consumer Discretionary Select Sector ETF (XLY)

Source: eSignal

On November 9 (red arrow), XLY was trading right on the long-term support (orange line) it had held since May 2022.

For XLY to hold support and rally from there, the Relative Strength Index (RSI) needed to begin tracking higher and break into the upper half of its range (above the green line).

The RSI tracked right along the top of the green line and briefly broke above it in early December. However, buying momentum soon evaporated…

Then, as the RSI fell back into its lower band, XLY broke down through long-term support before bottoming out in late December.

But take another look at what it’s done since then…

Consumer Discretionary Select Sector ETF (XLY)

Source: eSignal

As the chart shows, XLY rallied off its December low, and the RSI also rallied off oversold territory (lower grey dashed line).

This action now has the RSI pushing up against resistance at the same time that XLY is trading back on the orange line.

So what am I looking for around here?

Support Changing to Resistance

We know that the longer a support or resistance level holds, the more important that level becomes… And the bigger deal it is if that level is broken.

And once a support level is broken, then that level can often change into resistance.

So with XLY now trading right against resistance, what happens around this level is key… That’s why I’m keeping a close watch on the RSI.

For XLY to break back above the orange line and rally, we’ll need to see the RSI break through resistance and gain traction in the upper half of its range.

Any longer-term up move beyond that would then be reliant on the 10-day MA (red line) breaking back above and accelerating beyond the 50-day MA.

However, if instead both the RSI and the XLY stock price rebound lower off resistance, then XLY will likely have another leg down.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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