Stocks rallied higher on Thursday as investors expressed optimism following Fed Chairman Bernanke’s reassurance after the latest FOMC minutes released on Wednesday afternoon. Labor market data slid under the radar as the bulls turned the other cheek when weekly jobless claims came in worse-than-expected; 360,000 people had filed for unemployment benefits compared to the previous reading of 344,000 [see The Best Dividend ETF For Every Investment Objective].Our ETF to watch for today is the Consumer Discretionary Select Sector SPDR (XLY, A) as the latest consumer confidence data hits the street. Analysts are expecting for July’s consumer sentiment figure to come in at 84.1, unchanged from the prior month.
Consider XLY’s one-year daily performance chart below. Notice how XLY has traded higher within a fairly well-defined trading channel (blue lines) since the last time it rebounded off its 200-day moving average (yellow line) in November of 2012. The chart below reveals that XLY has a tendency to correct lower after grinding along, or deviating above, its upper resistance boundary. Similarly, it has a tendency to resume its uptrend following a pullback down to its lower support boundary. As such, jumping into a long position at current levels is not advisable for more conservative investors seeing as how XLY has broken above its longer-term channel [see 3 ETF Trading Tips You Are Missing].
On the other hand, taking a short position in XLY at current levels, although very lucrative, is quite risky given the incredibly strong long-term uptrend at hand [see also 17 ETFs For Day Traders].
If the latest consumer sentiment report comes in above expectations XLY should continue its rally higher; in terms of upside, there is no clear resistance level in sight since the security is trading in uncharted territory. On the flip side, weaker-than-expected sentiment can spark profit taking; in terms of downside, XLY should have immediate support right around $58 a share. 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.