Current Clues from Consumer Discretionary XLY and Staples XLP ETFs

Aug 2, 2010: 8:27 AM CST

What can the Consumer Discretionary (XLY) and Consumer Staples (XLP) ETFs tell us about the current state of the market?

For one, it can clue us in to whether investors are seeking risk – by a strong move in the XLY Consumer Discretionary (Retail) fund – or seeking to avoid risk and be defensive – by a strong move in the XLP Consumer Staples fund.

Let’s first start with a chart glance at XLY – Discretionary:

At first chart glance, we see that price broke above a declining trendline connecting prior highs to the April high – that’s bullish.

We also see price supporting currently both on the upside of the trendline and the 200 day SMA – currently at $30.75.  That’s also bullish.

As long as the XLY stays above $30.50, it will bode well for the market.

In terms of volume, volume has actually been trailing lower in July during the recent rally – that’s a non-confirmation that suggests that investors are not rushing to gain exposure to the Discretionary sector right now.

Let’s keep that thought in mind and compare the chart to the Consumer Staples fund, XLP:

Let’s start with volume before looking at the chart – and volume is clearly surging.  During July’s rally in the market, we saw strong volume steadily rise in the Consumer Staples fund.

This indicates that investors may be playing defensive, or seeking shelter by the comparatively stable price moves of the companies in the Staples fund – companies that sell things like toothpaste, food, cleaning supplies, and essentially goods that consumers must buy during economic booms and busts.

Also, the chart position of the XLP is stronger than XLY, namely from the XLP is down 4% (to the current day) from the April high while the XLY is down 12.5% from the high.

We see the same breakout above the declining trendline and respective support on the 200 day SMA – this time at the $26.60 price level.  The 20 and 50 day EMAs also converge as a potential support zone at $26.60.

What’s the take-away?

In terms of volume, relative volume rose in the Staples fund while relative volume fell in July for Discretionary – that implies that investors are seeking safety, rather than seeking risk and are more likely to play defensive.

However, both price charts of the XLY and XLP – along with that of the S&P 500, reveal that price has key support underneath them, and as long as that support holds, it’s bullish as price broke above a falling key trendline.

That’s a bit of a contradiction – so continue watching these price charts closely, most importantly in terms of their respective support areas:  XLY at $30.50 and XLP at $26.60.

One thing that this market teaches us is that only price matters – and that many investors are quite bearish on this market.

Another thing to watch going forward is a respective break to a higher high to shift the charts more bullish, which would be a break above $33.00 in XLY while the XLP has already made that higher high.  Look for a higher high above $27.50 to be quite bullish in XLP.

Corey Rosenbloom, CMT
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