U.S. equity indexes sank lower to start off the week as profit taking pressures following last week’s massive rally stuck around over the weekend. With no major data releases taking place on the day, investors continued to scale back their risk appetite amid the S&P 500 gaining nearly 20% year-to-date. Looking ahead, investors may get another “fiscal cliff” scare as Congress debates the debt ceiling, while the looming Fed Chairman appointment can also lead to a steeper correction [see 3 ETF Trades To Make Before The Congress Showdown].
Our chart to watch for today is the State Street SPDR S&P Retail ETF (XRT, A), which may experience volatile trading as investors digest the latest consumer confidence data. Analysts are expecting for the confidence index to come in at 79.5, which would mark a slight deterioration from last month’s reading of 81.5.Chart Analysis
Consider XRT’s one-year daily performance chart below. This ETF has been climbing higher within a fairly well-defined trading channel (red lines) since rebounding off its 200-day moving average (yellow line) at the end of 2012. As the chart below reveals, XRT has a tendency to correct lower upon deviating above its upper-resistance boundary for some time; likewise, this ETF has a history of rebounding off its lower-support boundary upon nearing it, as seen most recently at the end of August of this year [see Picture Edition: The Complete History of the Dow Jones Industrial Average].
With XRT currently trading near its upper-resistance boundary, taking on a long position is less than ideal here given the potential for a steeper pullback over the coming weeks; nonetheless, we would advise against jumping into a short position seeing as how XRT remains in a strong, longer-term uptrend [see Picture Edition: Major Asset Class Returns From The 2009 Bottom].Outlook
If the latest confidence data comes in above expectations, XRT will have a fundamental reason to rally; in terms of upside, this ETF still has to summit resistance at the $84 level. On the flip side, worse-than-expected consumer confidence can inspire further profit taking; in terms of downside, XRT has immediate support at $80 a share followed by the $76 level. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.
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Disclosure: No positions at time of writing.