For one of the less volatile sectors in the market, the Industrial Select Sector SPDR ETF (XLI) has moved around a lot in 2022…
From its January high to its June low, XLI dropped 22%.
Although that’s better than the Nasdaq’s 30% and S&P 500’s 25% drop, the nature of XLI’s fall has caught many investors off guard.
While XLI’s longer-term trend has been down, it has zig-zagged all over the place. As soon as XLI breaks out in one direction, it sharply turns and heads the other way.
When we last looked at XLI on August 10 (red arrow on chart below), it had rallied strongly off its June lows. However, a key signal was warning us of a strong reversal.
Today, we’ll discuss how that move panned out and what we can expect from here.
A Common Bear Market Pattern
On the chart below, the 50-day moving average (MA – blue line) shows XLI’s long-term downtrend began when the 10-day MA (red line) crossed below it in mid-January.
Industrial Select Sector SPDR ETF (XLI)
Source: eSignal
After rallying to a lower high in March, XLI soon resumed its downtrend before making yet another lower high in June.
This series of lower highs is a common pattern in a bear market.
Another bear pattern appeared when the Relative Strength Index (RSI) tracked in the lower half of its range (below the green line).
Apart from those two counter-trend rallies, the RSI tracked in this lower range for most of XLI’s downtrend.
However, after the RSI rallied out of oversold territory in mid-June (lower grey dashed line), XLI formed a short-term base (orange line).
Then, as the RSI broke back up through resistance into the upper half of its range, XLI’s rally started to gain traction.
On August 10, that rally had pushed the RSI into overbought territory (upper grey dashed line).
But as I noted then, just because the RSI is overbought, it doesn’t mean it’ll immediately reverse and enable us to enter a short position.
Instead, the RSI needs to form an inverse ‘V’ before we consider a short trade.
Had we entered a trade when the RSI initially went overbought, we would’ve been around $5 below its eventual high.
Only after the RSI reversed strongly and formed an inverse ‘V’ did XLI turn back down.
And now, with the RSI falling below support, what can we expect from here?
Little Momentum
Let’s take another look at the chart…
Industrial Select Sector SPDR ETF (XLI)
Source: eSignal
For XLI to have any chance of rallying, first the RSI needs to break back up through resistance and remain in the upper half of its range.
Then, the 10-day MA (which is currently trending lower), needs to turn around and head back higher.
However, the RSI is showing us right now that XLI has little momentum…
If the RSI keeps tracking in the lower half of its range – and the 10-day MA crosses below the 50-day MA in the coming week – then XLI’s current reversal will go further.
And there’s one more thing for readers to keep in mind…
While studying patterns is key to trading successfully (like here with XLI), sometimes market events go beyond conventional charts.
A massive shock can throw the whole market on its head. And I’m predicting such an event will take place just a couple of weeks from now.
And I want all my readers to pay close attention…
I anticipated the March 2020 crash, helping traders avoid the fallout… And going into this year, I said, “2022 will be a tough year for the broad market with Nasdaq underperforming all indexes. I believe all indexes will be negative for the year.”
Now I predict a market event could stir up additional volatility right around the corner. And I’m preparing an urgent warning that I’ll share next Wednesday, September 7 at 8 p.m. ET.
There, I’ll explain exactly what this shock will be… and more importantly, how you can profit off it. My years of trading have shown me how – if we’re prepared – we can turn this shock into a payday.
So please, click here to reserve your place and learn the best way to get ready.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
Do you think XLI has any chance of rallying?
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