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Keep an Eye on Industrials for Shorts

XLI could go even lower than $46


With last Wednesday’s post FOMC rally, many U.S. indices and stocks hit fresh year-to-date highs and forced more than a few fund managers to chase the market higher.  It turned out, however, that buying Wednesday’s highs likely was neither the smartest nor ‘coolest’ thing to do. After a consolidation day on Thursday, Friday ushered in some notable selling across the U.S. equities landscape.  The two sectors that stood out with relative weakness on Friday were the utilities and the industrials.  The utilities fell as rates stabilized after Wednesday’s plunge, causing rate doves to recede as quickly as they became loud on Wednesday afternoon.  Industrials, on the other hand, simply overstayed their welcome on the long side and on Friday  erased all of their gains from last Wednesday with a 1.70% drop.

On the chart looking back to November 2012, note that while the SPDR Industrial  Select Sector ETF (XLI) remains holding its uptrend, it has extended to the upper end of the trading range, and thus is in mean reversion territory.

xli weekly

On the daily chart, XLI  developed an evening star formation in the second half of last week, which is marked by Thursday’s up-gap and failure to push prices higher, and Friday’s down-gap and intraday selling.  From here the sector ETF doesn’t have much support until the $46 area, which marked the previous year-to-date highs from early August.  While the $46 area is less than 2% away from last Friday’s close, some individual industrial stocks are flashing the same signal which could push them relatively lower on a percentage basis.

xli daily

One such stock is Boeing (BA), which sports the same bearish evening star formation, which could push it quickly 4.00% – 5.00% lower before finding better support.

In summary, industrial stocks are flashing a warning signal after Friday’s sell-off, which is why I will be focusing on them in the near future for potential short-side trades.

BA evening star formation

Serge Berger is the head trader and investment strategist for The Steady Trader. Sign up for his free Weekly Market Outlook Video here.

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