Friday’s ETF Chart To Watch: Consumer Discretionary Select Sector SPDR (XLY)

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Major equity indexes remained resilient on Thursday as the bulls managed to hold their ground and regain momentum by the closing bell. Upbeat economic data on the day helped keep euphoria levels elevated on Wall Street; weekly jobless claims came in at 341,000, marking a healthy improvement in the labor market compared to last week’s figure of 368,000. Buying pressures were further bolstered after it was reported that Berkshire Hathaway and 3G Capital agreed to buy Heinz Co. (HNZ) in a deal valued at about $23 billion [Download 101 ETF Lessons Every Financial Advisor Should Learn].

Looking ahead, the University of Michigan is slated to release its monthly consumer sentiment survey results after the opening bell. As such, our ETF to watch is the State Street Consumer Discretionary Select Sector SPDR (XLY, A), which may see an uptick in trading volumes as investors digest confidence data. Analysts are expecting the consumer sentiment figure to come in at 75, which would mark a modest improvement over last month’s reading of 73.8 [see Consumer-Centric ETFdb Portfolio].

Chart Analysis

XLY has been climbing higher alongside major equity indexes since the start of 2013 and while its price action over the last few weeks is undeniably bullish, the longer-term technical pattern at hand suggests that a correction could be just around the corner. Notice how since bottoming out at $41.44 a share on June 4, 2012, this ETF has been climbing steadily higher within a crudely defined trading channel (blue lines). XLY has a tendency to bounce higher once it nears the lower-half of its trading channel and, likewise, correct lower after it tests the upper-boundary of its channel. This ETF has jumped above its upper boundary as seen in September of 2012, however, selling pressures eventually returned in October and November, bringing it back in line [see also How To use A Breakout Trading Strategy For ETFs].

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With XLY currently trading above its channel for the past few weeks, we feel that a pullback may be overdue given the historical pattern. XLY can just as easily continue to trade above its channel for weeks, but investors should be watchful for signs of a reversal, which could sink this ETF back below $50 a share and closer to the $48 level [see also 17 ETFs For Day Traders].

Outlook

If the latest consumer sentiment survey paints a worrisome outlook for the domestic recovery, XLY could face headwinds on the day; in terms of downside, this ETF has immediate support at $50 a share followed by the $48 level. However, if consumer confidence comes in better-than-expected, the bulls may have all the more reasons to continue their ascent; in terms of upside, this ETF has no clear resistance levels in sight as it is trading in uncharted territory. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.

Follow me on Twitter @SBojinov.

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Disclosure: No positions at time of writing.

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