Throughout the week, we've been raising some caution flags about the short-term direction of equities (here, here and here). Now that we're seeing some downside follow-through for the first time since December, I wanted to outline a few more potential short setups on an absolute and relative basis.
First, let's start with why I'm looking at these sub-sectors to begin with. The S&P Midcap 400 Consumer Discretionary Index is one of the cleanest charts I see out there on an absolute basis, with well-defined risk and reward/risk clearly skewed in favor of the bulls. Since there's no exchange-traded fund (ETF) to trade this, I had to look through some of the individual components to see how we can best express this thesis in the market.
That brought me to the VanEck Vectors Gaming ETF (BJK), which is failing to reclaim support near $38.30 as the 200-day moving average catches down to price and momentum diverges negatively. As long as prices are below that level, the risk is to the downside toward its 2018 lows.
In terms of the iShares US Home Construction ETF (ITB), what really intrigued me is its chart relative to the consumer discretionary sector as a whole, represented by the Consumer Discretionary Select Sector SPDR ETF (XLY). Prices recently retested their 2016 lows and a downward-sloping 200-day moving average, unsuccessfully, and are now rolling over again.
This suggests continued underperformance from this sub-sector and a great pairs trade as long as prices are below their year-to-date highs.
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