Technology and Consumer Stocks Fall to Support (XLK, XLY)

The technology and consumer discretionary sectors have been strong in 2017, up 15.43% and 11.58%, respectively. The gains were larger at the start of June, before these sectors sold off. Overall, the trends remain up, but the short-term pullbacks have pushed the prices toward a support level. During an uptrend, a support area can be used as a potential buy point, if the price shows respect for that area by stalling at or bouncing off of it. If the price declines below support, it signals a potential exit (for longs), since the dynamic of the market has changed and further declines could develop.

The Technology Select Sector SPDR ETF (XLK) has been respecting a rising trendline since June 2016. The June 12 sell-off touched the trendline for the first time since April. After the April trendline touch, the ETF advanced almost 10%. The trendline intersects near $55, which is the area to watch for buy signals. (The 50-day moving average is also aligned with this level.) Buy signals are valid slightly above, right at or just below the trendline. (See also: Big Money Flows Into Big Tech ETFs.)

Buy signals to watch for include a bullish engulfing pattern or a small multi-day consolidation from which the price breaks higher. These patterns show that the price reached the support area and found buying interest strong enough to start pushing the price higher again. If the price keeps falling through the trendline without providing a bullish signal, long trades should be avoided, and selling current long positions may be considered. If the buy signal occurs, the target is the top of the channel (which only extends back to February) at $58.

Chart showing Technology Select SPDR Fund (XLK) near long-term channel support

The Consumer Discretionary Select Sector SPDR ETF (XLY) has been moving within a trend channel throughout 2017. The June sell-off has pushed the price toward channel support at $89.50 to $89.25 (also where the 50-day moving average intersects), but it isn't quite there yet. On June 9, the price fell as low as $89.56 but then quickly rallied back above $90. If the price continues to fall into the $89.50 to $89.25 region, watch for a bullish signal, such as a bullish engulfing pattern or a small multi-day consolidation from which the price breaks higher. (See also: Amazon Effect: Stock Soars, ETFs Get Bigger.)

The signals are valid slightly above, at or slightly below the trendline. If the price keeps falling through the trendline without providing a bullish signal, long trades should be avoided, and selling current long positions may be considered. If the buy signal occurs, the target is the top of the channel at $92.75.

Chart showing Consumer Discretionary Select SPDR Fund (XLY) near long-term channel support

The Bottom Line

It is important to respect the long-term uptrend but also to respect that reversals do occur and that eventually there is a sell point for everything. The technology and consumer discretionary ETFs have performed well over the past 18 months, and buying near support could well provide another opportunity to ride the next price wave up. If the price continues to decline, taking out the prior swing low, it is likely that lower prices will be forthcoming. If opting to a enter position, only risk a small portion of account capital on any single trade. (For more, check out: How to Trade a Summer Correction.)

Charts courtesy of StockCharts.com. Disclosure: The author does not have positions in these ETFs, nor major holdings within them.