Earnings Will Reveal a Fresh Look Into Our Wallets’ Habits

Earnings season is about to go into full swing…

That means we’ll soon find out how consumers and companies are getting along.

Consumers have already had to deal with 300-basis points (or 3%) of rate rises this year.

And with inflation still running at over 8%, these results will reveal how much consumers are reeling in their personal consumption.

Yesterday, we checked out one part of the consumption equation in the consumer staples sector. Today, we’ll continue with the theme.

Let’s look at the Consumer Discretionary Select Sector ETF (XLY) to scope out potential trades…

Steady Decline

On the chart below, the 50-day moving average (MA – blue line) shows XLY’s steady decline from the start of 2022 through July.

During that fall, XLY made a series of lower highs as it lost a mammoth 37% of its value.

Let’s take a look…

Consumer Discretionary Select Sector ETF (XLY)

Source: eSignal

There were also two other classic signs of XLY’s bearish pattern…

1. The RSI tracked in the lower half of its range (below the green line) for most of the down move.

2. The 10-day MA (red line) also tracked below the 50-day MA – apart from those lower highs in March and April.

As you can see, XLY initially found support (orange line). But then it jumped when the RSI rallied strongly out of oversold territory (lower grey dashed line) in May.

When that rally faltered and XLY rolled over at ‘A,’ it then retested and held that support.

As the RSI tracked higher – making a series of higher lows (bottom red line) – XLY rallied higher again.

This time, XLY’s rally was stronger than the short-term bounce in May.

The 10-day MA crossed above the 50-day MA and the RSI bullishly broke into the upper half of its range.

Take another look at the chart…

Consumer Discretionary Select Sector ETF (XLY)

Source: eSignal

However, XLY peaked at ‘B’ when the RSI formed an inverse ‘V’ and reversed from overbought territory (upper grey dashed line).

XLY then fell as the RSI broke through support into its lower range. And the 10-day MA broke strongly below the 50-day MA.

When we looked at XLY a couple of weeks ago (red arrow), it was closing in again on its long-term support (orange line).

Now, with XLY retesting that support and the RSI again in oversold territory… what can we expect from here?

Holding Support

Right now, the 10-day MA is still accelerating below the 50-day MA. And the 50-day MA has rolled over and is trending down.

Unless either of these moves peters out or reverses, XLY will break through support and start another leg down. This could provide the setup for a short trade.

We’ll also need to keep a close watch on the RSI. Although it’s formed several ‘V’ moves this past month, each of those moves quickly ran out of steam.

For XLY to hold support – or have any chance of rallying – we’ll need one of these ‘V’ moves to garner more momentum and send the RSI back up toward resistance.

Any prolonged move for XLY beyond that would require the RSI to break back into the upper half of its range.

This earnings season will likely stir up a fresh wave of volatility as the market digests companies’ results.

But for traders ready and nimble enough, it’ll also hand us plenty of trading opportunities.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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