Wednesday’s ETF Chart To Watch: Industrial Select Sector SPDR (XLI)

by on February 27, 2013 | ETFs Mentioned:

Equities appear to be resuming their uptrend without much of a struggle, showcasing their resilience when considering last week’s short-lived, but steep, sell-off. The bulls had few reasons to stay on the sidelines on Tuesday amid a sea of better-than-expected economic data on the home front; the Case-Shiller Home Price Index came in at 6.8%, marking a massive improvement over last month’s figure of 5.5%, while new home sales data also blew past expectations, with this figure coming in at 437,000 compared to the previous month’s reading of 378,000. To top it off, consumer confidence also gave markets a reason to rally after this figure came in at 69.6, trumping estimates of 62.3 as well as last month’s figure of 58.4 [Download 101 ETF Lessons Every Financial Advisor Should Learn].

Investors’ attention will likely remain fixated on the home front later today as durable goods orders data hits the street at the opening bell. As such, our spotlight will shift onto the State Street Industrial Select Sector SPDR (XLI, A), which may see an uptick in trading volumes as markets digest the latest manufacturing data. Analysts are expecting for durable goods orders in January to have contracted by 5%, marking a sizable deterioration from the previous figure of 4.3% [see How To Take Profits And Cut Losses When Trading ETFs].

Chart Analysis

XLI appears to have completed a correction since recently hitting a high of $41.42 a share on 2/20/2013. This ETF slipped lower alongside major equity indexes during the second half of last week; however, it appears to have found its footing around the $40 mark and may be gearing up for a rebound. Notice how this ETF previously rebounded off the $40 level at the start of February of this year, and went onto charge higher in the days following [see How To Swing Trade ETFs].

Click to Enlarge

Furthermore, notice the longer-term trading channel (blue lines) that XLI has remained within since mid-November of 2012. With XLI trading near the support line of its channel, we feel that entering into a long position is attractive for two reasons. First and foremost, investors can closely manage downside risk by setting a tight stop-loss below the recent low underneath $40 a share. Second, this ETF has decent upside potential when considering the technical pattern at hand and the fact that it’s trading near the very bottom of its channel [see ETF Technical Trading FAQ].

Outlook

If the latest durable goods orders report comes in better-than-expected, it could serve as a catalyst to propel XLI back towards the top of its trading channel; in terms of upside, this ETF has major resistance around $41.50 a share. On the other hand, disappointing data can serve to knock XLI out of its channel; in terms of downside, this ETF has immediate support at $40 a share followed by the $38 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.