The Consumer Discretionary SPDR Stalls At Key Retracement

12/13/05 08:15:19 AM

by Arthur Hill

After a big move in November, the Consumer Discretionary SPDR has stalled over the last few weeks and underperformed the S&P 500.

Security: XLY
Position: Hold

On the daily chart (Figure 1), the Consumer Discretionary SPDR (XLY) gapped higher in late October and surged more than 10% by late November. The move broke trendline resistance and retraced 62% of the prior decline. This advance certainly looks impressive, but the retracement is normal for a corrective advance. Securities typically retrace 38-62% of their prior moves. Even though the stock overshot the 62% mark, it has certainly stalled over the last few weeks, and this affirms retracement resistance.

FIGURE 1: XLY, DAILY. The Consumer Discretionary SPDR gapped higher in late October and surged over 10% by late November.

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

In addition to a retracement, the stock is running into resistance from a prior consolidation. The 34 level marked support in early August and resistance in early September, while 33 marked support in last August and early September. Taken together, these extend into late November and early December to mark a resistance zone (gray rectangle).

Since moving above 33.5, the stock consolidated over the last few weeks and formed a pennant. These are continuation patterns, and a move above the early December high would signal a continuation of the prior advance. This would be quite bullish. A failure to break out and a support break at 33 would be bearish. The initial downside target would be the October lows.

For clues on the direction of the break, my eyes are on the price relative. This shows the performance of the Consumer Discretionary SPDR (XLY) relative to the S&P 500. The price relative surged in early November, but then traded flat and moved slightly lower. This means that XLY has underperformed the Standard & Poor's 500 over the last few weeks and increases the odds of a support break at 33.

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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The Consumer Discretionary SPDR Stalls At Key Retracement

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