The following post was initially issued to TLS members on May 7, 2018; XLP would bottom out the very next day and is up 10% since.
Beaten down sector ETF may be on verge of a mean-reversion bounce.
While the major stock averages remain mired within their unceasing trading ranges, there are a few areas that have either broken out or, more likely, broken down. Falling into that latter category is the consumer staples group. For example, using the popular Consumer Staples SPDR ETF (XLP), we find that the group is one of only a few areas to actually break below its post-2009 Up trendline.
After testing the bottom side of the broken trendline last month, XLP’s selloff accelerated. It is now down nearly 20% from its all-time high, set just in January.
However, there is hope for the sector — in the form of Fibonacci. XLP’s selloff has brought it down near the 49.60 level. It just so happens that 2 major Fibonacci Retracements — and potential support — lie precisely at that level:
- The 23.6% Fibonacci Retracement of the 2009-2018 Rally
- The 38.2% Fibonacci Retracement of the 2015-2018 Rally
This area *should* stem the selling in XLP, at least temporarily. In fact, it is compelling enough to us for a mean-reversion long “trade”. XLP has been wavering back and forth near that 49.60 level. As long as it remains above there, we like it as a long trade, with potential targets of 51.20, 52.60, 54 and 55. Note: we don’t typically use targets, except in the case of mean-reversion, counter-trend trades. A close below last week’s lows around 48.75 and we’d get out as well.
If you’re interested in the “all-access” version of our charts and research, including more ideas like this XLP trade, please check out our new site, The Lyons Share. You can follow our investment process and posture every day — including insights into what we’re looking to buy and sell and when. Thanks for reading!
Disclaimer: JLFMI’s actual investment decisions are based on our proprietary models. The conclusions based on the study in this letter may or may not be consistent with JLFMI’s actual investment posture at any given time. Additionally, the commentary provided here is for informational purposes only and should not be taken as a recommendation to invest in any specific securities or according to any specific methodologies. Proper due diligence should be performed before investing in any investment vehicle. There is a risk of loss involved in all investments.