Will This Chart Pattern Go Seven for Seven?

When consumer confidence wanes, people are less likely to spend money. And that can be bad for the economy and markets.

Typically, I look at the non-essential or discretionary part of spending. Stocks in this sector, like Tesla and Amazon, have had a particularly challenging year.

But today, I’m going to turn our attention to the other side of the consumption equation by checking out the Consumer Staples Select Sector SPDR Fund (XLP).

Although XLP has traded sideways since the start of 2022, it has experienced some big swings along the way.

We checked out one of those when we looked at XLP back in June (red arrow on the chart below).

Now, after yet another big move, XLP could be setting itself up for a potential trade.

Sideways Trading Range

On the chart below, we can see how the 50-day moving average (MA – blue line) has kept XLP flat overall throughout 2022.

Yet during that time, the shorter-term 10-day MA (red line) has crossed the 50-day MA five times, making for some decent-sized swings…

Consumer Staples Select Sector SPDR Fund (XLP)

Source: e-Signal

Another key indicator on this chart is the action of our momentum tracker – the Relative Strength Index (RSI)…

XLP has made three major peaks at ‘A,’ ‘B,’ and ‘C.’ Each of those peaks formed with a wave of momentum (RSI) pushing higher in the upper half of its band (above the green line).

However, all three peaks reversed when the RSI formed an inverse ‘V’ from overbought territory (upper grey dashed line) and began to track lower.

While these patterns on the chart show repeatable setups for a short trade, it’s the bottom half of the RSI that I want to focus on today… especially with the RSI tracking so close to oversold territory (lower grey dashed line).

You’ll see on the chart below how I’ve put red circles where the RSI formed a ‘V’ around this oversold territory.

Each time the RSI made this ‘V’ and began to track higher, we saw XLP bounce.

Consumer Staples Select Sector SPDR Fund (XLP)

Source: e-Signal

Sometimes these moves are brief, as in January, February, and earlier in September…

And other times (March and June) XLP rallied strongly after the RSI eventually broke through resistance and rose into the upper half of its range.

Either way, the same pattern has repeated… When the RSI formed a ‘V’ from oversold territory, XLP rallied six out of six times.

So what am I looking for around here?

Repeatable Patterns

With the RSI tracking near oversold territory, I’ll be watching it closely over the coming days.

If it can form another ‘V’ and rally higher, then this pattern may repeat for a seventh straight time.

But don’t forget that we’re not specifically aiming to get in on a “big-time” move.

Even if the RSI rebounds but then peters out at resistance, that can still provide the setup for a quick, profitable trade.

But a repeat of the previous patterns is key…

That means we need to see the RSI form a definitive ‘V’ and track higher before committing ourselves to a long trade.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

In today’s mailbag, we’d like to welcome Peter – a new subscriber to The S&P Trader – and congratulate him on his recent gains…

Dear Larry,

I joined The Opportunistic Trader very recently and then watched your webinar about The S&P Trader and Quad Witching. I immediately signed up to the annual and the extra year for around $2,500. I’m writing to tell you I have paid for it all using the S&P trades. And in just 24 hours, I sold my three SPX puts at 3975 for a 218% profit!

As the figures came out, the indices all fell from positive 200 points to negative 600 points. When the market opened, SPX fell from 4110 to around 4020 – and a text came in saying to sell your put options at market rate (immediate sell) which I had already done!

Here is the result! The cost for 3 x 3975 SPX puts yesterday was $2,553. I sold just 24 hours later for $5,580! This is a 218.5% return and $3,027 profit! It’s an understatement to say I’m delighted!

– Peter M.

Thank you as always, for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].