Selling pressures swept over Wall Street on Wednesday as mixed earnings on the day and upcoming economic data releases prompted many to lock-in profits. Investors rejoiced as Apple (AAPL) beat analysts’ estimates and rallied +5% on the day, although a worse-than-expected forecast from Caterpillar (CAT) sent a wave of worry across the market as investors interpreted the words of cautions from the machinery giant as a sign that global growth is still sluggish at best [see How To Take Profits And Cut Losses When Trading ETFs].
Our ETF to watch for the day is the Industrial Select Sector SPDR (XLI, A), which will look to summit resistance after investors digest the latest round of manufacturing data. Analysts are expecting for June durable goods orders to have grown by 2.3%, which is a slight deterioration from last month’s reading of 3.7%.
Consider XLI’s one-year daily performance chart below. This ETF has been trading higher within a fairly well-defined channel (red lines) since it rebounded off its 200-day moving average (yellow line) in mid-November of 2012. Furthermore, XLI has a tendency to sharply correct down to its lower-support line after grinding along, or breaking above, its upper-resistance boundary, as seen in the first half April this year and most recently in the second half of June. With XLI currently trading right along resistance, we feels that traders can favorably position themselves in anticipation of a pullback by utilizing a tight stop-loss near the recent highs in case the bulls return with little warning [see How To Swing Trade ETFs].
Despite the attractive downside potential, we advise investors to hold off from taking on a short position here, seeing as how the longer-term trend is still undeniably very bullish [see also ETF Call And Put Options Explained].
If the latest durable goods report comes in well above expectations, XLI should have the winds at its back for the day; in terms of upside, this ETF has no clear resistance level in sight after its all-time high at $45.64. On the other hand, disappointing data can easily bring out the bears and encourage profit taking; in terms of downside, this ETF has support at $44 a share followed by the $42 level. 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.