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XLP Trapped In Consolidation Range

01/28/10 01:15:12 PM
by Chaitali Mohile

The Consumer Staples Select Sector has formed a bullish flag & pennant on the daily as well as the weekly time frame. What about the breakout and the trading range?

Security:   XLP
Position:   Buy

An aggressive bullish rally of the Consumer Staples Select Sector (XLP) that started in early March 2009 turned sideways under the resistance of the 50-day moving average (MA). Since the momentum was very fresh, the rally had enough strength to breach the MA resistance. The moving average convergence/divergence (MACD) (12,26,9), after a bullish crossover in negative territory, gradually surged above the zero line, indicating a developing momentum (Figure 1). Therefore, XLP consolidated for a shorter period. The yellow block on the weekly chart in Figure 1 shows the consolidation.

The positive directional index (+DI) of the average directional movement index (ADX) (14) moved upward, dragging the trend indicator in the bull's favor. The relative strength index (RSI) (14) rallied above 50 levels, generating bullish strength in the price action. XLP was recharged and underwent a healthy rally going above the 200-day MA and moving from $25-$27. Meanwhile, the three indicators reached their highest levels of bullishness. The RSI (14) in Figure 1 declined from an overbought area; the ADX (14) is overheated and is likely to move straight above 40 levels, while the MACD (12,26,9) showed a bearish crossover in positive territory. Thus, the picture resulted in a bullish consolidation, forming a bullish flag & pennant pattern.

FIGURE 1: XLP, WEEKLY. The indicators are not reflecting any bullish or bearish breakout of the flag & pennant pattern. In such a scenario, XLP would continue consolidating in the narrow range.
Graphic provided by:
During consolidation XLP was in an uptrend, and therefore, the pattern is considered to be a continuation pattern. After the breakout, the bullish flag & pennant resumed its existing upward rally. The volume marked in the black box shows high volatility during consolidation. Currently, the bullish breakout is not indicated on the weekly time frame as bullish strength has descended and the uptrend is overheated.

The bullish flag & pennant pattern also appeared on the daily frame, thus making the formation reliable.

FIGURE 2: XLP, DAILY. The negative divergence of the RSI (14) and the MACD (12,26,9) changed the vertical directional of the rally to sideways.
Graphic provided by:
In Figure 2, we can understand the trading aspect of XLP during consolidation. The vertical black line on the chart shows the bullish conditions that further resulted in a negative divergence toward the rally. Therefore, the sector index consolidated and formed the bullish flag. The trading range for XLP is from $26.25 and $27. The frequent ups and downs of volume shows trading activity within the upper and the lower range. Equal buying and selling strength discouraged the trend from developing in a particular direction. Currently, XLP has established support at the lower range and could surge toward the upper range, offering one more buying opportunity. However, the current bearish rally might pour additional volatility. Although we cannot predict the breakout period, the target to be observed above the upper range is $27 - $23.75 = 3.25 + 27 = $30.25.

To conclude, XLP is likely to continue its range-bound price action. The picture does not suggest any breakdown or pattern failure. The breakout rally could hit the short-term target of $30.25, but until then traders can take advantage of trading within the range.

Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
E-mail address:

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