After a short burst at the start of the year, the Consumer Discretionary Select Sector ETF (XLY) rolled over and fell in February.

XLY then bottomed out and slowly ground higher before rallying strongly mid-year.

When we checked in on XLY in mid-June (red arrow in the chart below), strong buying momentum in both Tesla (TSLA) and Amazon (AMZN) was driving that rally. Together, they represent around 40% of XLY’s holdings.

But after rallying to 15-month highs, XLY reversed again in July.

Then XLY found a base last month as buyers returned. Today, I want to see if XLY’s longer-term uptrend remains.

Multiple Bullish Signals

XLY’s chart below shows its strong up move at the start of the year.

That move started when the Relative Strength Index (RSI) rallied strongly out of oversold territory (left red line).

Consumer Discretionary Select Sector ETF (XLY)


Source: eSignal

That strong surge put the RSI into overbought territory (upper gray dashed line). And XLY soon reversed as the RSI retraced lower.

XLY then began to slowly grind higher from March onward along with two bullish technical signals.

  1. The RSI gained traction in its upper band, where it remained until XLY’s pullback last month.

  2. The 10-day MA crossed above the 50-day MA and accelerated higher. That pulled the 50-day MA higher, adding to XLY’s bullish sentiment.

When we looked at XLY on June 15, the RSI had gone into overbought territory again.

XLY went on to make higher highs (upper orange line) despite the RSI flattening out (lower orange line).

This type of pattern, when the RSI runs along overbought territory, is quite common when a stock is rallying strongly.

But it also makes it vulnerable to a fall if buying momentum (RSI) reverses. And that is what we saw.

As momentum lessened, the RSI fell through support (green line) and into the bottom half of its range. The 10-day MA also fell back below the 50-day MA.

Yet in a repeat of January’s pattern, the RSI has recently returned from oversold territory (right red line).

Take another look:

Consumer Discretionary Select Sector ETF (XLY)


Source: eSignal

Our two MAs are also coming together, so another crossover is likely.

So what am I expecting from here?

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Bouncing Off Support

After breaking into its upper band, the RSI has recently tested and bounced off support (green line).

For XLY’s rally to continue (and its longer-term uptrend to hold), the RSI must remain in this upper range. Any break below support would pull XLY lower.

The other thing to watch closely is our two MAs. As I mentioned, they have recently started converging.

The 10-day MA breaking strongly above the 50-day MA and accelerating higher would further drive XLY’s longer-term rally.

The next test for XLY’s rally is to take out its July 19 high.


Larry Benedict
Editor, Trading With Larry Benedict


Do you think XLY will keep rallying? Write in to [email protected]