The S&P 500 is divided into eleven sector index funds and this report takes a look at one of the index funds namely the Industrial Select Sector SPDR (XLI). Industries in the Index include commercial services and supplies, aerospace and defense, building products, construction and engineering, electrical equipment, conglomerates, machinery, air freight and logistics, airlines, marine, road and rail.
Several charts are provided as part of the discussion for the industrials sector (XLI ETF) and will form the primary framework for which this index fund will be analyzed for the sole purpose of determining the progression of the XLI and identifying potential profitable opportunities. Ultimately, a trade bias is also provided at the end of this report.
The timeframe analyzed is indicated on each chart and it is also important to keep in mind that all analysis and details provided are based specifically on technical analysis.
XLI has been in a secular bull market since 2009 along with the S&P 500 from which the index (XLI) is derived. The overall progress made by former and the latter is shown below. Use of a percentage scale indicates that the XLI has outperformed the S&P 500 on a percentage basis ever since the start of the bull market in March 02, 2009.
Both remaining in an overall uptrend especially with the XLI outperforming the S&P500 does indicate economic prosperity for the United States, which is key for sustaining a bull market.
The most powerful chart pattern is a trend line. The Weekly tf chart above is captured for the XLI to show the evolution of trend since 2009 using trendlines. The major trendline is in black color, and a close below could result in a selloff in the XLI. The trendline in red is also valid as it does connect at least two (2) price points and or pivots, while the trendline in blue (the steepest) that originated on ~June 27, 2016 has currently been broken to the downside as shown on the chart.
The Weekly chart of the XLI was captured to investigate other chart pattern(s) that could possibly be present closer to more recent price action. The blue line as drawn on the chart indicates the formation of a descending triangle chart pattern. This chart pattern is bearish most of the time, but not 100% of the time. In fact, failure of the chart pattern (i.e. breakout to the upside) can lead to very explosive market movement to the upside. The black arrow shown is used to approximate the width of the descending triangle. In the case of a breakout below the pattern, the width can be used for a vertical projection to estimate what price point will be targeted.
The pink lines (support) drawn on the chart are very important because they play a key role in the structural development of prices in the XLI to the upside. Just like a classic technical analysis support or support region, it is better to confirm the support levels using another independent technical analysis tool to help increase the probability that price will find a floor that will be used for the next propulsion to the upside.
Support as indicated on the chart is provided below (in descending order):
- 70.31, 70.83 and 71.45
- 68.63 and 68.76
- 66.07, 66.12 and 66.31
- 61.71 and 61.78
The last chart provided in this analysis is shown below. It provides a quick, yet highly effective snapshot of the XLI since the inception of the current bull market since 2009. Use of a logarithmic scale was warranted as a log scale makes it easier to see and/or examine a chart pattern(s) that is/are present over a longer time period. A price channel as indicated in the chart below is very important and should play a major role in the future price development of the XLI, whether bullish or bearish.
Green circles drawn on the chart indicate price points/pivots that are connected to draw the bullish channel. Support lines calculated in the previous chart are also included here to help further help in navigating future price movements for the XLI.
A break below the descending triangle could possibly target the support level (i.e. 66.07, 66.12 and 66.31) indicated with the red asterisks because different independent technical analysis techniques (i.e. support level and the bottom of the channel) coincide and thus increase the odds of the XLI having buyers overwhelm sellers which consequently would cause a resumption of a bullish move in the XLI.
The following conclusions are derived based on the charts analyzed above.
- There is no clear evidence of a bear market for the XLI.
- Any current sideways trend or bearish action will not last, and the XLI is likely to resume its bull market.
- A break to the downside of a bullish price channel that has been in inception for over 8 years could possibly trigger massive shorting (sell) of the XLI.
- Any sell off currently in price of the XLI should target one of the support levels outlined above. Lack of confirmation of a support level means that it will eventually give way to further downside in XLI, even if temporarily.
This analysis favors a long (buy position) for the XLI. Since long term (investments) pay less attention to entry price, a long or (buy) position as soon as possible is the trading bias that we maintain.
A more conservative entry into a long (buy) position can involve entry only when price action closes to the upside above the current descending triangle just above ~$76.86.
Other options that are even more conservative are the following:
- Buy on a breakout past the previous high made on January 29, 2018 of ~ $80.96.
- Most conservative: Long position established after price has broken and consolidated above the previous high of ~$80.96.
Report is prepared by technical analyst, Tola Ogunniyi.
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