Staples Not Holding

As you can see in the weekly chart below, for the first time in eight years the consumer staples ETF, XLP, has breached its long-standing uptrend support line. The good news is first time breaches typically indicate nothing more than a correction/consolidation is taking place with the uptrend still intact. I like to look at a shorter term time frame to see if the finer granularity helps provides some clues on what may be in store.

san francisco east bay area retirement planning and investment advisor CFP wealth manager -  XLP weekly 11-1-17.png

Inspecting the daily chart of XLP below, we can see price is below a still rising 200-day moving average, has reached an oversold RSI momentum condition and created a series of intermediate term lower highs and lower lows, all markers of a short-to-intermediate term downtrend. Those with pattern recognition experience will note price formed a head and shoulders topping pattern. Friday’s gap down and close below the neckline was the confirmation needed the pattern was “in play”. It is normal with these patterns that price rallies and tests the neckline from the underside which is exactly what is occurring right now.  It’s what comes from that retest that is crucial.

san ramon retirement planning and investment advisor CFP wealth manager -  XLP Daily 11-1-17 .png

A retest and failure of a break back above the neckline suggests a continuation lower and downside target in the T1 support zone. A retest, break above and hold above the neckline would be a very bullish sign and provide an excellent risk-reward entry point for those who want to be long consumer staple stocks.