Industrials SPDR Leads With A Breakout

11/17/05 01:17:53 PM

by Arthur Hill

After a 12-month trading range, the industrials SPDR is finally breaking free, pointing to higher prices.

Security: XLI
Position: Accumulate

On the weekly chart shown (Figure 1), it is clear that the industrials SPDR (XLI) never broke down in 2005 and instead held the majority of its prior gains (2003-04). The stock advanced from around 18 (March 2003) to 31 (December 2004) with a 22-month run. Since January 2005, the stock has consolidated with a big symmetrical triangle. These are neutral patterns that require a break for a directional bias.

FIGURE 1: XLI. On this weekly chart, it is evident that this industrial SPDR never broke down in 2005 and held most of its previous gains in 2003-04.

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

Before moving on to the breakout, I would like to point out that this chart has all the earmarks of an advance, pennant, and continuation breakout. However, a pennant usually covers a much shorter time frame (one to four weeks). Even so, the structure of a sharp advance and tightening consolidation (pennant) is clear. I view a consolidation after an advance as a mere rest in the uptrend, and a continuation should be expected (just like a pennant).

Returning to a symmetrical triangle, the stock broke trendline resistance with a surge over the last four weeks. However, resistance from the summer highs is close at hand (30.80). The trendline break is the first step, and a higher high is needed to prove the bulls mean business. The stock has not forged a higher high in 2005, and 30.80 needs to be taken out.

Astute technicians are likely to point out that volume over the last four weeks was below the September-October levels. That is true, but I am impressed with the accumulation distribution line. This indicator bottomed in August and moved to a new high in October. Even though the stock closed weak a number of times in September and October, the closes were well off the weekly low, which showed the ability to rally off the lows (gray oval). This is a good start and a break to new highs would be the icing on the cake.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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