For much of last year’s bull run, mega-cap tech stocks carried the market on their backs.
Stocks like Amazon (AMZN), Microsoft (MSFT), and Apple (AAPL) helped propel the Nasdaq to all-time highs.
However, this year those high-flying stocks – and their sky-high price-to-earnings (P/E) multiples – have come crashing back to Earth…
Money has rotated out of this once-hot sector and into other parts of the market such as old-fashioned industrial stocks.
While the Industrial Select Sector SPDR ETF (XLI) has still been buffeted, it’s held up relatively well. Its August high was just 6% below its January peak.
When we last looked at XLI (red arrow on the chart below), it had just rolled off that August high and begun retracing lower.
Since then, after finding support, XLI has again rebounded strongly.
With that upward move in full swing, today we’ll see what’s in store from here…
Finding a Base
On the chart, you can see that XLI has made a series of lower highs. Yet it has a much gentler slope than the tech-heavy Nasdaq (down 17% from its January peak to its August high).
The 50-day moving average (MA – blue line) in the chart below shows that downtrend…
Industrial Select Sector SPDR ETF (XLI)
Within that down move, the short-term 10-day MA (red line) shows that XLI has had multiple countermoves…
Those moves occurred in March and April, and again in May and July – with the most recent move higher kicking off around the middle of October.
Today I’m going to focus on this most recent pattern, which compares nicely to the July rally.
XLI found a base during the July rally (A). The Relative Strength Index (RSI) formed a ‘V’ out of oversold territory (lower grey dashed line) and then made a series of higher lows (red line).
XLI’s rally then began to gain traction off the back of two key technical signals…
The RSI broke into and remained in the upper half of its range (above the green line).
The 10-day MA broke strongly above the 50-day MA and continued to accelerate higher.
That rally ran out of steam when the RSI went into overbought territory (upper grey dashed line).
The RSI formed an inverse ‘V’ and then tracked lower. And XLI’s rally reversed before eventually finding support (B) again from September through October (orange line).
Take another look below…
Industrial Select Sector SPDR ETF (XLI)
Like the pattern at ‘A’ in July, the recent support at ‘B’ coincided with the RSI rallying out of oversold territory with a series of higher lows (red line).
However, it’s the action of both the RSI and MAs that I’m watching closely from here. So what can we expect?
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Closing in on Overbought Territory
As the chart shows, the 10-day MA is right on the verge of crossing back above the 50-day MA…
If the 10-day MA breaks above and continues to accelerate higher than the 50-day MA, then this current rally could have further to play out.
However, the recent strong upward move has the RSI rapidly closing in on overbought territory. And what happens around this level will be key…
If you look at the previous rally (A), XLI continued to soar as the RSI tracked along the upper grey dashed line. XLI only peaked when the RSI formed an inverse ‘V’ and reversed.
I’ll be looking to see if this pattern repeats.
Only when the RSI forms another inverse ‘V’ (not before) and starts to track lower will we know that this rally has petered out.
Such a move could then provide the setup for us to get a potential short trade underway.
Editor, Trading With Larry Benedict
In today’s mailbag, One Ticker Trader members share their thoughts…
Larry, I’m very pleased with your information, explanations, and trade results. I’m new to stock option trading and have been able to start off the One Ticker Trader system with positive results.
– George H.
I got out at 25.5% earlier today. Larry, keep on sending trades that can go up 25% in 24 hours. Thanks.
– Ghassan K.
Thank you, as always, for your thoughtful comments. We look forward to reading them every day at [email protected].