Tuesday’s ETF Chart To Watch: Consumer Discretionary Select Sector SPDR (XLY)

by on July 31, 2012 | ETFs Mentioned:

After a strong finish last week, equity markets got off to a quiet start as investors were reluctant to jump in long ahead of this week’s central bank meetings. With the FOMC slated to meet on Wednesday and the European Central Bank rate decision taking place on Thursday, it’s not much of a surprise to see low-volume profit taking as investors position themselves defensively in anticipation of volatility. The U.S. employment report due out on Friday will also come into focus as investors look for signs that the domestic recovery is still chugging along [see also ETF Insider: Momentum Hinges On ECB Hopes].

The homefront will be flooded with economic data release today, giving investors plenty to react to and digest. As such, the State Street Consumer Discretionary Selector Sector SPDR (XLY, A+) will make its way onto our radar screen since consumer spending and consumer confidence reports will come into focus. Analyst are expecting for consumer spending to rise by 0.1% after coming in flat last month, while consumer confidence is expected to come in at 61.4 versus last month’s reading of 62 [see also Want Juicy Dividends? Buy The Top 5 Commodity Megacaps].

Chart Analysis

XLY has been stuck in a well-defined trading range (blue lines) since it recently corrected lower after peaking at $46.27 a share on May 1, 2012. Since early May of this year, notice how XLY has been bouncing off the $42 level after failing to summit (on several occasions) the $44-$45 resistance level. This ETF has been oscillating in a fairly predictable manner over the past few months, which makes a short position attractive at current levels as XLY is trading near the upper-half of its range [see also How To Lose Money Trading ETFs].

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One piece of contradictory evidence, however, is the fact that XLY has recently established a higher level of support closer to $43 a share, which may suggest that bullish pressures have been building in the background [see also 3 ETF Trading Tips You Are Missing].

Outlook

If history repeats itself from a technical perspective, selling pressures should follow the release of the consumer confidence and spending data; in terms of downside, this ETF has support at $43 a share followed by major support at the $42 level. A bullish reaction to the latest data may, however, prompt a rally; in terms of upside, XLY could face resistance as it nears the $44.75-$45 levels. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.

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Disclosure: No positions at time of writing.