Combining Trend Analysis with Momentum

Adding a trend line to the price chart can enhance our analysis. The blue line is a rising trend line that has acted as resistance to every price advance in this ETF. Resistance is the point at which supply overwhelms demand and the price cannot move higher with that imbalance. At the same time, we saw the momentum divergence (with one brief day above) price being resisted by this trend line, reiterating the point that XLB might move lower.

Moving to the Consumer Discretionary Select Sector SPDR (XLY), we can apply the same principles to this ETF. RSI points to the same strong momentum off the February bottom as the indicator moved above 70 in March and barely stayed above 30 on the June correction. However, the same divergence and failure to reach 70 has been marked by the red line. The difference for XLY is in the price chart. The price of XLY has moved above previous resistance which was the high price points in November and December. With this price breakout, if the RSI moves above the falling red line and goes above 70, it could portend nice price gains in the future.

If however price confirms the weakening momentum profile and moves back below the blue line, this would mark a classic ‘failed breakout’. A failed breakout is a price movement above resistance that cannot hold causing many traders to sell positions because big price gains can no longer be expected. At just 2.86% of the S&P 500 price weakness in XLB may or may not lead to price weakness in the S&P 500, but at 12.5% XLY is much more important to monitor!

Sean Dillon is a Technical Analyst at Pinnacle Advisory Group, a participant in the ETF Strategist Channel.