Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free weekly newsletter.
After rising close to 160% from the lows in March 2009 to the highs in early May, industrial stocks as measured by the Industrial Select Sector SPDR (NYSE:XLI) have come under pressure and broken the blue uptrend line, which is a development worth noting.
The early July new highs in the transportation sector were not matched with new highs in the industrial sector, which signals weakness. Historically transports have been a leading indicator, so this development is also worth noting.
On the daily chart dating back to October 2010, note the head-and-shoulders pattern in place, which broke its neckline at the $35 mark last week. The target of the head-and-shoulders here could be as low as the $31 area. We measure this by taking the distance from the head to the neckline and subtracting it from the neckline.
Yesterday, the XLI also closed with an engulfing candle/outside day on the daily chart, signaling further weakness and the potential to eventually slide toward $31. It is important to keep in mind, however, that these types of head-and-shoulders pattern don’t often reach their ultimate target in a straight line. A relief rally could easily lift XLI back toward the $36 area before ultimately heading lower again.
The key to this trade will be the entry point. Should a further relief rally occur, and depending on where one goes short, stops could be placed between $36 and $36.50 with the ultimate profit target near $31, but scaling out of the trade along the way.
- See Sam Collins’ Daily Market Outlook: One Sector You May be Able to Count On
- See Serge Berger’s Daily Market Outlook: How High Could a Rally Take Us?
- See Sam Collins’ Trade of the Day: DDS Stock Priced Right
