Wednesday’s ETF Chart To Watch: Industrial Select Sector SPDR (XLI)

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Equity markets dragged sideways with a downward bias as “fiscal cliff” headlines took a pessimistic turn after President Obama held his ground on the issue of raising tax rates for the wealthiest of Americans. As the gridlock in Congress continues to boil, trading activity remains fairly range-bound on Wall Street with no major data releases having enough sway to bolster stocks in either direction; on the international front, the Reserve Bank of Australia cut its benchmark rate down to 3.0%, while the Bank of Canada kept theirs unchanged at 1.0% [see also 5 ETF Bargains For The Holiday Shopping Season].

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Our spotlight will shift onto the State Street Industrial Select Sector SPDR (XLI, A+), which may see an increase in trading activity as investors digest October’s factory orders data after the opening bell. The U.S. industrial sector has been on the radar screen for many since last week’s encouraging GDP report, although disappointing ISM data from Monday served as a reminder that the recovery is bound to be slow and steady at best. Analysts are expecting for the latest factory orders figure to come in at -0.1%, marking a major decline from the previous reading of 4.8% [Download 101 ETF Lessons Every Financial Advisor Should Learn].

Chart Analysis

This year has shaped out to be quite the roller coaster ride for XLI; after soaring to $38.17 a share on March 15, this ETF went onto endure a major correction back to its 200-day moving average (yellow line) only to rebound higher and pump its breaks around virtually the same price level, which it failed to summit before. Since mid-August economic uncertainties have kept a lid on industrials, and XLI has managed to carve out a fairly well-defined range for itself, with support coming in around $36 a share (blue line) along with resistance near $37.50 a share (red line) [see 5 Important ETF Lessons In Pictures].

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Given XLI’s range-bound pattern and the fact that it’s currently trading closer to the upper-half of its channel, we advise conservative investors to hold off from jumping into a long position at current levels [see ETF Technical Trading FAQ].

Outlook

If factor orders data comes in better than expected, XLI could have the wind at its back; in terms of upside, this ETF has major resistance around $27.50 a share. On the flip side, a disappointing economic data release may inspire profit-taking pressures in this sector; in terms of downside, XLI has major support around the $36 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.

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