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XLY Forms Ascending Triangle

04/27/06 09:01:46 AM
by Arthur Hill

The Consumer Discretionary SPDR continues to underperform the broader market, but an ascending triangle breakout could change that.

Security:   XLY
Position:   Accumulate

In Figure 1, the top chart shows the XLY/NYSE Composite ratio or price relative. This is used to measure relative strength. XLY is outperforming when the price relative rises and underperforming when the price relative declines. The price relative has been declining since November, and XLY has underperformed the broader market over last six months. It would take a move above the upper trendline and the early April low to reverse this trend.

FIGURE 1: XLY. This SPDR is underperforming the broader market, but an ascending triangle could change that.
Graphic provided by: MetaStock.
Graphic provided by: MS QuoteCenter.
Even though the price relative is clearly bearish, the price pattern for XLY is not bearish at all. After a big advance in November, the index consolidated the last few months with an ascending triangle. There is resistance just above 34 and three rising lows over the last three months (lower triangle trendline). These rising lows show buying pressure coming into the stock at higher and higher levels, which is bullish. The equal highs represent resistance or overhead supply, and this is the level the bulls must break to confirm the pattern.

A break above 34.2 would confirm the ascending triangle and target a move to around 35.5. This may not seem like much, but such a breakout would be bullish for this key sector and the Standard & Poor's 500. Not only that, the knock-on effect could be even greater. The lower trendline, April low, and the 200-day simple moving average (SMA) all mark support around 33.8. Failure to break out and a move below these levels would be bearish and would call for lower prices.

Arthur Hill

Arthur Hill is currently editor of, 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 and the main contributor to the ChartSchool.

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Date: 04/29/06Rank: 4Comment: 

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