Discretionary income is the amount of money that is left for spending, investing, or saving after paying for necessities such as food, shelter, clothing, and taxes. Companies that primarily benefit from consumer spending have been hit particularly hard during the coronavirus pandemic as people around the world stay home and keep a closer eye on their savings than they did a few short months ago.
In this article, we'll take a look at several charts that traders use to track consumer discretionary spending and try to determine where prices could be headed over the next several weeks or months.
Consumer Discretionary Select Sector SPDR Fund (XLY)
Active traders often turn to popular exchange-traded products such as the Consumer Discretionary Select Sector SPDR Fund (XLY) when trying to get a sense of where a specific market segment is headed. As you can see from the chart below, the consumer discretionary sector was trading along a well-defined uptrend until the breaks below key support levels on worries of the coronavirus in early March. The strong bounce off the lows in late March has led many traders to start talking about a continued move higher.
At this stage, followers of technical analysis will likely want to take note of several levels of resistance between $120 and $130 and how they could stand in the way of a significant move higher. More specifically, traders will also likely want to take note of the bearish crossover between the 50-day and 200-day moving averages, which is a common long-term sell signal. This bearish crossover between the long-term moving averages is commonly used to mark the beginning of a major downtrend, and it will likely be used by the bears in determining the placement of stop-loss orders. Bullish traders may want to remain on the sidelines until the price of the fund closes above one of the trendlines or until other technical indicators show signs of a move higher.
Starbucks Corporation (SBUX)
One of the top holdings of the XLY ETF that greatly benefits from consumer discretionary spending is Starbucks Corporation (SBUX). As you can see below, the recent bounce from the March lows has sent the price toward the resistance of the 200-day moving average (red line) and an influential horizontal trendline.
These guides will likely be used by the bears when placing orders and represent significant resistance to any form of major move higher. Bearish traders will also likely look to the crossover between the 50-day and 200-day moving averages and mark it as the start of a long-term downtrend.
Nike, Inc. (NKE)
Another top holding of the XLY ETF that could capture the attention of active traders is Nike, Inc. (NKE). As you can see from the chart below, the pattern looks nearly identical to the others mentioned above.
The rise toward the combined resistance of the dotted trendline and its 200-day moving average are major flags for bulls looking to enter the market. Based on the tenets of technical analysis, the price action over the next several sessions will be a strong indication of the momentum that will dominate the trend over the weeks ahead, and followers of technical analysis will likely hold a downside bias until indicators suggest otherwise.
The Bottom Line
The consumer discretionary sector has been hard hit by the slowdown in the economy due to the coronavirus pandemic. The strong rise over the past several weeks has many traders talking of a move higher. However, based on the charts discussed above, nearby resistance levels and bearish crossovers between long-term moving averages suggest that prices could be headed lower over the coming weeks.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.