Chart Advisor: Predicting Industrials Improvement

Articles From: Investopedia
Website: Investopedia

By Foram Chheda, CMT

1/ Communication and Technology May Underperform 

2/ Consumer Staples May Take a Breather

3/ Risk-On Environment Continues; Discretionary May Relatively Outperform  

4/ What Else Looks Good?

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1/Communication and Technology May Underperform 

Courtesy of StockCharts.com

When SPDR Sector ETFs are benchmarked against the broader S&P 500 Index (SPY), it appears that the Communication Services ETF (XLC) has rolled inside the weakening quadrant. The Energy space represented by XLE also languishes inside the weakening quadrant. Isolated moves apart, these two groups may relatively underperform the broader markets.’ 

While Technology (XLK) and Financials (XLF) are inside the leading quadrant, a good improvement in relative momentum is also seen in the Consumer Discretionary (XLY) and the Industrials (XLI) space. Utilities (XLU), Real Estate (XLRE), and Consumer Staples (XLP) also stay firm inside the improving quadrant.

2/ Consumer Staples May Take a Breather  

Courtesy of StockCharts.com

Consumer Staples (XLP) has faced resistance in the 74.60 – 76.70 area multiple times over the past year and a half. It has again faced resistance in this zone, and the decline pushed the ETF to find support at the 200-week MA. 

On the other hand, the Consumer Discretionary (XLY) remains much stronger from a technical perspective. Although not exactly classical, XLY has formed an inverse Head & Shoulders pattern on the weekly chart. This can prove much more potent as it has occurred after a decline. We can see the levels of 188 and 207 being tested over the coming weeks.

3/ Risk-On Environment Continues; Discretionary May Relatively Outperform

Courtesy of StockCharts.com

Risk-on environment exists when risker and high beta assets are preferred over the less risky and defensive assets. The Relative Strength Line (RS Line), when the Consumer Discretionary ETF (XLY) is compared against Consumer Staples (XLP), has formed a new high and stays in a firmly rising trajectory. Consumer Discretionary generally outperforms staples and other defensive pockets during the risk-on structure of the markets. 

4/ What Else Looks Good?

Courtesy of StockCharts.com

The Industrial Sector ETF (XLI) and Technology Sector ETF (XLK) look good on the chart individually despite being very differently placed on the RRG.

XLI is placed inside the lagging quadrant but it is seen sharply improving its relative momentum against the broader S&P 500 Index. It is presently at its high point.

The weekly MACD has shown a positive crossover. Some consolidation may not be ruled out at current levels but XLI is nicely placed to post incremental gains over the coming weeks. The Technology Sector ETF (XLK) has also broken out from a minor falling channel after encountering a classical double top resistance. XLK now trades at its high point and keeps the underlying primary uptrend intact.  

Originally posted 12th December 2023

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