Why This Sector Could Crack Under Pressure

One sector that has been fighting headwinds all year is consumer discretionary…

Runway inflation has led the Federal Reserve to jack up interest rates by 375 basis points (3.75%) since the start of the year.

And that has pummelled two heavyweight tech stocks that make up around 44% of the Consumer Discretionary Select Sector ETF (XLY) holdings – Amazon (AMZN) and Tesla (TSLA).

Tesla is trading at its lowest level since June 2021, while Amazon is trading at its lowest level since March 2020.

That has seen almost 40% wiped off the value of XLY since its January peak. And now XLY is retesting a long-term support level.

When we last checked XLY on October 18, it had just tested and held that support level.

But now that same level is under huge scrutiny again. So today, let’s see what’s in store for XLY…

Pressure Is Intensifying

On the chart below, you can see a classic bear pattern in action.

XLY made a series of lower highs at A, B, and C. The long-term 50-day moving average (MA – blue line) trended lower from January through mid-July.

Take a look…

Consumer Discretionary Select Sector ETF (XLY)

Source: eSignal

Although the 50-day MA counter-rallied from late July, it rolled over again in October and has been heading down since then.

Also, notice the action of the shorter-term 10-day MA (red line)…

The down moves after each of the peaks at A, B, and C coincided with the 10-day MA rolling over and then crossing below the 50-day MA.

The most recent crossover in September occurred as XLY traded down to long-term support (orange line) – a level it’s held since May 2022.

When we looked at XLY on October 18, it held that level and rallied slightly higher. However, that move ran out of steam when the RSI ran into resistance.

Let’s take another look at the chart…

Consumer Discretionary Select Sector ETF (XLY)

Source: eSignal

With the RSI reversing off resistance and now stuck in the lower half of its band, the pressure on XLY’s long-term support level is intensifying.

Remember – the longer a support (or resistance) level holds, the stronger that level becomes. And it becomes a bigger deal when that level is finally broken.

So with XLY right on support, what can we expect from here?

It’s Getting Difficult to Hold Support

For XLY to hold support, the RSI needs to start tracking higher with a series of higher lows – like it did from mid-June through July.

Any longer-term up move beyond that will depend on the RSI breaking back into the upper half of its range – and staying there.

If instead, the RSI continues to meander in the lower half of its range, then it’ll become increasingly difficult for XLY to hold support.

A decisive break below support would be the start of another leg down, and provide the setup for a potential short trade.

I’m also watching our two MAs…

The 50-day MA is trending down again. And the 10-day MA is firmly tracking below it.

Unless the 10-day MA can break back above the 50-day MA, then the long-term downtrend will ultimately prevail.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

Today we’d like to welcome two new subscribers, Frank and Nalini, to One Ticker Trader…

Hi Larry,

I’m a new subscriber to your One Ticker Trader strategy. I just finished reading your two reports: “Larry’s Guide to Options” and “The One Ticker Retirement Plan.” I sat on the sidelines and watched your last successful trade.

I have my TD Ameritrade account unlocked and I’m ready to execute on your next recommendation. I’m excited about getting started with your trading strategy.

– Frank B.

Good afternoon, Larry.

I want to say thank you for sharing the option on QQQ. I’m a recent subscriber and joined your special for $19. I made a 125% return. Please keep sending us the options trades. Thank you, and have a good day.

– Nalini B.

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