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January 30, 2006
Fed and Earnings, XLY Forms Rising Wedge, RTH holds support and XLF Broadens
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Good Monday Morning! The Fed meets this week and earnings season remains in full swing. After a sharp move lower on 20-Jan, stocks rebounded last week and recovered most of the options-related losses. I would expect slow trading ahead of the Fed and a pickup in action after the announcement on Tuesday afternoon. Wednesday AM could hold the key to the next significant move and I will be watching for the post Fed reaction more than the pre-Fed posturing. Today, I will look at three key ETFs. Have a good day!
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The Consumer Discretionary SPDR (XLY) is one of the most cyclical of the sector ETFs and therefore most prone to economic fluctuations. The stock has rising the last few months and formed a rising wedge from Oct-Jan. These are potentially bearish patterns, but the bulls get the benefit of the doubt as long as the wedge rising. I am watching the lower trendline for the first signs of trouble. A move below last week’s low (32.86) would break this trendline and put the rising wedge in play. This would call for a continuation of the Aug-Oct decline and project a move below the October low.
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The S&P 500 is not going far without the Consumer Discretionary SPDR (XLY). The Consumer Discretionary SPDR (XLY) is not going far without the Retail HOLDRS (RTH). This is perhaps the most important industry group right now. Even though rising oil prices have not affected the overall market, they have affected the Retail HOLDRS (RTH), which remains in a downtrend and below its mid January high. This weakness is weighing on the S&P 500 and has limited gains. There are signs of support around 94-95, but no signs of buying pressure. RTH needs to break above 98 to reverse the current downtrend and revive the Consumer Discretionary sector. I am also watching RSI, which has been trending lower the last few months. RSI needs to move above the red trendline extending down from late November to turn momentum bullish.
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The Finance SPDR (XLF) broke support on 20-Jan, but recovered last week and gapped higher on Thursday. This is certainly positive price action and makes the support break a bear trap. However, the broadening pattern over the last two months shows a torn market. The higher highs favor the bulls and the lower lows favor the bears. The end result is a broadening formation (magenta trendlines) that whipsaws both. What a mess. As long as Thursday’s gap holds, it should be considered bullish. A move back below 31.5 would be most negative.
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Posted by Arthur B. Hill at January 30, 2006 10:44 AM