Stock prices, as measured by the
SPDR S&P 500 (
have fallen about 8% in the past two months. Traditional technical
indicators now say that SPY and otherstock market index
exchanged-traded funds (
) are oversold, a condition that could lead to a short-term price
rebound. In addition, sentiment has reached a level that is usually
seen near short-termmarket bottoms. We last saw this combination of
indicators in July, and a six-week, 10% rally followed.
At the bottom of the chart, the 26-weekrate of change (ROC ) is
being used to measure momentum.Bollinger Bands have been added to
highlight extremes. Bollinger Bands are calculated during the last
50 days and use 2.1standard deviations , the settings recommended
for use with indicators by John Bollinger in his book, Bollinger on
Bollinger Bands. Oversold levels occur when theROC drops below the
Sentiment is often measured by surveys. The American Association
of Individual Investors (AAII) questions individuals every week
asking if they arebullish ,bearish or neutral on the market. The
most recent survey shows that only 28.8% of individuals are bullish
and 48.8% are bearish. Long-term averages show we would normally
see about 40% bulls and 30% bears.
With bulls at a four-month low and momentum oversold, a rally
could be expected and seasonal tendencies reinforce that outlook.
The S&P 500index has been up in December 74% of the time since
1928. This is the strongest performance seen in any month of the
The recent sell-off has done some damage to the technical
picture for most stocks and sectors. Of the nine major SPDR sector
ETFs, only three are above their 200-day moving averages. Among
Consumer Discretionary Select Sector SPDR (
seems most likely to outperform in the next four to six weeks.
The chart above shows that the two-weekRSI has fallen below 15
for XLY. This happens about three times a year on average, and 23
times in total since XLY began trading. One month later, XLY has
been higher 61% of the time. The average one-month gain has been
about 3%, while the average loss has been about 1%. Additionally,
on a seasonal basis, XLY is even stronger than SPY having closed up
77% of the time in December.
Using the200-day moving average at as a stop, the risk is
limited on this trade. Themoving average is at $44.58, which is
less than 1% from the current price and in line with the historic
average risk on this trade. Theprofit target is $46.25 based on a
3% price move, again using the historic average to find the
potential reward of the trade.
Traders willing to accept more risk on a dollar basis can
consider options. January $44call options are trading at about
$1.70 and would be worth at least $2.25 if XLY reaches the target
price for a 32% gain. A stop-loss level of $1 should be used with
the call options. This trade carries higher risk compared with a
stock purchase; however, the higher potential percentage gain could
make it more attractive to some traders.
Stocks may be in the beginning of abear market , but this trade
could work even if further declines lie ahead for the market, as
December is historically a good time to own stocks. Even in the
bear market that started in 2008, both SPY and XLY delivered small
gains to traders.
Action to Take -->
Buy XLY at $45.25 or less, set the stop-loss at $44.58 and set a
profit target at $46.25 for a potential 2.2% gain by year-end. You
can also buy XLY Jan 44 Calls at $1.80 or less, set the stop-loss
at $1 and set a profit target at $2.25 for a potential 25% gain in
© Copyright 2001-2010 StreetAuthority, LLC. All Rights Reserved.