Consumer Staples Are Living Dangerously

Not all sectors in the US stock market are created equal. One of the things we pride ourselves on is that we’re constantly looking at the individual sector charts, both on an absolute and relative basis. When we run these scans, we analyze each sector on multiple time frames, from the the longer-term all the way down to the very short-term for entry and exits. If you’re interested in receiving these annotated sector charts with commentary please register here.


Today we’re focusing on Consumer Staples. I have a few charts that are all telling a similar story. The first one is a simple logarithmic scale candlestick chart showing current prices dangerously flirting with both the uptrend line from the 2009 low and the nearer-term uptrend line from the 2011 correction lows.

 2-6-14 xlp

The next chart takes a closer look at the recent action. Still a weekly candlestick chart with those uptrend lines, but this time with Momentum and Relative Strength plotted below. The first thing we should notice is the false breakout in the 4th quarter of last year. Once that breakout failed, the fast move down has been relentless. But to make matters worse, with that brief high, momentum (measured using a 14-period RSI) was putting in a bearish divergence by not confirming. Meanwhile, relative strength was also not confirming as staples relative to the S&P500 were also rolling over. Not good.

 2-6-14 xlp w rsi and rs

Now here is the daily candlestick chart. This time I added a the 50 and 200 day moving average. As I always try to focus on, the direction that the moving average is trending in is more important that the actual level of the average. In this case both the 50 and 200 day are trying to rolling over and trend lower. This alone, at the very least, tells us that staples will have a hard time sparking a sustainable rally here.

 2-6-14 xlp daily

But look at the 3 months of price action that is left up there above resistance. It’s almost looks like an island reversal which is extremely bearish. It’s not exact but if you look at the 10/28 gap up and 1/23 gap down, you can certainly make the case for it. But either way, island reversal or not, the implications are the same. This 42 levels is now a big problem. And rally attempts from here will run into this key resistance level as well as these two moving averages that are now rolling over.

Finally, look at the relative strength index (RSI) reaching oversold conditions. That’s not a good thing. You hear people talk about oversold conditions as a positive. Not true bigger picture, as this is clear evidence of an overwhelming amount of sellers, hence the “overly” sold nature that is being characterized as.

Short-term there should be some demand down at these levels as there was last summer. But I think any bounce from down here will run into that overwhelming amount of sellers mentioned earlier. This is a vulnerable sector on an absolute basis. But relative to the overall market, this has been a major underperformer since last April and I don’t see any evidence yet of that changing.

I’d be selling any rips.


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Tags: $XLP