There’s a simple rule of thumb when it comes to economics

When times are good, people spend money. When they’re not, that money stays under the mattress.

That’s why consumer spending is a great way to measure market confidence – and keep tabs on the economy…

If consumer confidence is decreasing, that means less money is going into the economy… and that can be bad for the market.

Over the past few months, we’ve taken several deep dives into one part of the spending equation… discretionary spending.

Today, I want to look at the other side of that equation – consumer staples (essential items).

One of the ETFs I use to trade this sector is the Consumer Staples Select Sector SPDR Fund (XLP).

Let’s check out the chart…

Consumer Staples Select Sector SPDR Fund (XLP)

Source: eSignal

The uptrend in XLP got underway back in March of this year. That was when the short-term 10-day moving average (MA) – the red line – crossed above the long-term 50-day MA (blue line).

From there, XLP rallied until it ran into resistance – the dark blue horizontal line just under $72.

After pulling back through June – with the 10-day MA crossing down over the 50-day MA – XLP bottomed out before rallying to its all-time high of $73.25.

After hitting that all-time high, XLP retraced again before trying to rally… this time, though, the rally fizzled out at a lower high.

XLP then rolled over, with the 10-day MA again crossing down over the 50-day MA. XLP bottomed out (‘A’) along with the Relative Strength Index (RSI) bouncing along the oversold line (lower grey dotted line).

And this is where the chart gets really interesting.

Let’s take another look…

Consumer Staples Select Sector SPDR Fund (XLP)

Source: eSignal

On the right side of the chart, I have drawn another dark blue horizontal line. This is at the same level as the other dark blue line that became a resistance level back in May and June.

As you can see, XLP is quickly closing in on that level. And, the RSI at the bottom of the chart is showing increasing momentum. I’m watching to see how the RSI reacts as XLP closes in on that dark blue line.

If XLP bounces lower off the dark blue line – along with the RSI giving an overbought signal (above the upper grey dotted horizontal line) – that could be extremely bearish…

If that dark blue horizontal line holds (resistance), that could mean a head-and-shoulders pattern is almost complete. The two dark blue lines form the shoulders, and the middle section is the head (August through September).

To complete the pattern, XLP must rebound back lower off the right dark blue line and trade back down to ‘A’.

This pattern can often be a sign of a major reversal. So, traders like when they see a major uptrend turn to a downtrend (or vice versa with an inverse head-and-shoulder pattern).

After all, this is where big money can be made…

If XLP then breaks down through ‘A’ – meaning the head-and-shoulders pattern is complete – that could provide an opportunity to enter a short trade.

Right now, it’s still early. First, we’ll need to see XLP bounce lower off the right ‘shoulder’ and retrace all the way back to ‘A’.

However, should that happen, that would likely mean a major reversal is underway… And that could prove very profitable to trade.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

I’m always glad to receive great feedback from enthusiastic readers. Here are some responses…

Larry’s newsletter is terrific. It’s well written and very informative. Thanks.

– Chuck

And regarding Friday’s essay about the GDP…

Well said Larry. The GDP number is managed and includes some government spending. Looking forward, we don’t know what the government will spend, but it won’t be enough to fill the lost economic GDP in my opinion.

– Thomas

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