Staple those Discretionaries! (XLP,XLY)

A broken record.

 

When I was young, and kids listened to LPs, there was an expression that epitomized someone who droned on repetitively about this or that. We said he sounded like a ‘broken record’.

 

It wasn’t such a friendly moniker, but for us, it summed things up nicely.

 

And today, at the risk sounding like the same broken record we mocked in our youth, we feel compelled to repeat the message we’ve been broadcasting for several weeks now.

 

Again!? Why!?

 

Well, because we believe that all the ballyhoo currently being trumpeted across the airwaves and over the fibreoptic lines that span the financial world is no more than that – just plain old ballyhoo. And the market crash of biblical proportions that all the fancy-pants fund managers and media talking heads would have us believe is already upon us – isn’t.

So Blunt Chick

And what’s more, we believe the opportunity to cash in wildly – indeed, quite possibly the last chance to cash in like Crowbar Jim Dundee did at the Lee Family Laundromat – is today upon us.

 

The Proof, Willy, Give us the Proof!

 

Who you calling Willy?

 

The charts below come from every corner of the market and demonstrate enough technical evidence in aggregate to give us confidence that an interim bottom is in and better days lie ahead for the bulls.

 

Let’s take a casual gander-meander at them to see what they offer.

 

First, a number of charts are showing unequivocal signs of positive divergence, with both RSI and MACD indicators ramping higher for at least a month (in some cases, two) against declining price action.

 

The charts of a great many indices, tech stocks, financials, even the quintessential high yield ETF, HYG, are all presenting the pattern, of which we offer just three below for your gazing pleasure.

 

The first is the iShares China Large Cap ETF (NYSE:FXI) –

FXI Technical

Considering that China is where the whole mess began, we view the latest cooling in selling pressure as a plus.

 

Look now at crude oil, the other leg upon which the latest market infamy has been standing –

USO Technical

Here, too, we see the same divergence (in green), prompted by a deeply oversold RSI read (in red) that occurred against the backdrop of a massive surge in volume (in blue).

 

All of which tells the same story – that the oil slide has slowed.

 

Be ready shortly for a meaningful bounce.

 

And finally, we look at the aforementioned iShares iBoxx High Yield Corporate Bond ETF (NYSE:HYG), a worthy barometer of risk in the equity markets if there ever was one.

 

Take a peek –

HYG Technical

And what’s she telling us?

 

Like the pair that preceded her, HYG’s divergence is a signal that the selling is losing momentum. And in the case of each (FXI,USO, and HYG), it’s also clear that RSI and MACD indicators are fast approaching their midway waterlines, a bullish indication that would trigger a large flow of technical buying once they surface.

 

Sexy Techs Retrace their Steps

 

That’s the positive divergence, which, again, is in evidence from a great many individual stocks as well.

 

Look now at a few popular tech stocks, Microsoft (NASDAQ:MSFT), Facebook (NASDAQ:FB), and Alphabet Inc. (NASDAQ:GOOG), and pay particular attention to the gaps that have closed for these issues over the last week, reliable signs that the accounts have now been closed, and a new round of buying can again begin.

 

First up is Microsoft. After four months of waiting, the retracement to cover the October gap was finally completed last week.

MSFT Technical

With its shares sitting above all but the short-term moving average, Microsoft is now ready to begin a healthy move higher.

 

Next is Facebook, the poster child of the current bull market, and she, too, is now poised to move higher after covering the gap that opened in late January.

FB Technical

We would also point out that Facebook is coming off new highs set just two weeks ago, and that there’s little on the chart that speaks to genuine technical weakness. Look for FB to be among the leaders in the final push higher.

 

Ditto for Alphabet (Google), whose chart shows a gap filled just last week, after a four month delay.

GOOG Technical

Gaps that have closed indicate a technical watershed, and are fairly reliable indicators that the move that was formerly underway will now continue.

 

We take heart from the fact that GOOG shares are also holding at the 137 day moving average, and that all her moving averages are unfurled. It may take a few days, but we expect to see Google shares resume their rally toward the last retracement high at $790 before long.

 

Recap and Retool

We’re going to package all this up for you into a neat trade for the day, but first we want to review one more corner of the market.

 

The tug’o’war between spending on what we need and what we want is reflected neatly in the charts of the consumer staples sector and the consumer discretionaries. When things are going well, and we’re all working and confident regarding the future, the discretionaries outperform. When we’re worried, the staples.

 

And so it’s been for the last few months. We’ve put our stock (literally) in the staples, as the chart below shows.

XLP XLY Technical

This is the Consumer Staples Select Sector SPDR ETF (NYSE:XLP) mapped against its rich sister, the Consumer Discretionary Select Sector SPDR ETF (NYSE:XLY) since the summertime highs.

 

And as you can see, the two held fairly closely to one another until January, at which point confidence in the discretionaries fell off the charts.

 

But as we’ve shown above, with an imminent move higher for the indexes now likely, it’s very likely we’ll see the gap between the two close. And that’s the basis for our trade today.

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Options Trader Elite recommends you buy the XLY June 72 CALL for $2.76, and sell the XLP June 51 CALL for $1.29, for a total debit of $1.47.

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Many happy returns,

 

Matt McAbby

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