Entering XLP (Consumer Staples)

Today we will be entering a position in the XLP, which represents the Consumer Staple sector. Several of the holdings within the fund include: Coca Cola, Procter and Gamble, Phillip Morris and Costco. These are the Mega Cap companies, the household names for products you and your family have used forever. Typically this is a defensive group that pays solid, growing dividends and consistently produces solid yet unspectacular returns for shareholders. The chart is setup very nicely for us and has triggered a buy signal.

The first chart is a look at the daily view. What I like here is the breakout above the prior high. Not only did the XLP close above that prior high, it traded on higher volume indicating further strength and confidence in the move. Also you can see that the long term Relative Strength is trading right above a key uptrend support vs. the S&P500. The long term Relative Strength has been present in XLP, but recently the price action has been poor. Now we have the price confirmation to enter the position.

Our second chart is the weekly view and shows how price has retaken the rising 20 WMA after closing below it for 3 consecutive weeks. The breakout this week can also be seen clearly here on the weekly chart. Our stop will be placed initially right near $40. That area represents the rising 20 WMA and the prior support, turned resistance that this week's breakout triggered from. I would also be willing to exit this position should the Relative Strength begin to fail.

---There are a few other positions that I am watching very closely as well. We are nearing buy signals in:

DDD
AAPL
XLE
XLB

DDD

 Looking at the daily chart of DDD we had a false breakdown of this triangle pattern, but price has recovered and is now sitting above the downtrend resistance, prior triangle support and above the 20/50 DMA's. The final evidence that we will need to believe that this "breakout fake-out" will follow through to the upside will be a close above the prior high at $48.90. A close above that level and we will reenter the position. From false moves, come fast moves. And we want to be a part of this trade if a move above the prior high confirms. This will be something I am watching Friday and may enter at the close should DDD gain that 1% and close higher.  

AAPL

Apple has begun to show further signs of finally putting in a bottom. We are seeing a positive divergence in momentum suggesting a change is building (take a look at the MACD or RSI on the weekly view). Price has been making new lows while momentum has made higher lows.

 After a long downtrend like this, a stock will typically form some sort of base of support. Within the support base, a pattern will likely emerge giving some hint to the future direction of the eventual breakout. I believe we are seeing a possible Double Bottom formation here from the lows in mid-April and the low of the last week of June. If you remember back to our discussion of reversal patterns, for a Double Bottom to trigger we need to see a break above the high that formed in between the two bottoms. So, the most important thing to watch for will be a break and close above the base highs at $453.

We can also see that the 20 WMA, which has been declining steadily, is beginning to flatten out. This suggests that downside momentum is slowing. Ultimately I will want to see price move above the 20 WMA and then see that average turn and begin to slope higher.

Lastly, Relative Strength vs. the SP500 has been forming a wedge pattern. The direction of the breakout will be very instructive as to whether this will be a successful position for us or not. A break above the wedge resistance will signal our bullish thesis, a break below will keep us sidelined.


XLE (Energy)

After exiting this position 2 weeks ago it has broken back through resistance and seems to be wanting to move higher. When we sold this I may have been a little hasty and tried to out think the setup. What I was seeing was a false breakout above key resistance, a weak bounce attempt (low volume rally after a breakdown) that failed at the underside of the flattened 20 WMA and a weakening Relative Strength reading vs. the SP500. All those things contributed to me making the call that we should wait and pick a better spot. However our stop at $75 was never breached (this shows why you should always stick to your stops and not try to anticipate a move).

Since the decision to sell was made, a likely better situation may be near. Now that price has moved back above the 20 WMA, we need to see confirmation from Relative Strength of out-performance, and we need to see the prior weekly closing high at 82.12 taken out. With those signals in place we would then re-enter the position. This is again another setup that could trigger with today's action, although I expect a little more time may be needed.

**An important lesson can be made here: When trading the markets its okay to be wrong on a position, but IT IS NOT OKAY TO STAY WRONG. If we think one thing but the market gives us another, we need to be flexible enough in our methods to accept that we are wrong and correct the situation. Staying wrong can get you into the uncomfortable position of taking too big a loss that your investing capital is deeply damaged...not to mention, your poor damaged ego. Although it was your ego that got you in too deep in the first place. We will be wrong a lot, what we can't do though is dig our heels in and try to force our will onto the market. Believe me, the market will only laugh at your pain and take your money. If you are wrong admit it quickly and take your small loss. There will always be another setup that comes along, you just have to make sure you still have an account balance and can take advantage of the next one.


XLB (Materials)

Materials are in a similar boat as Energy and we need to see the prior resistance highs taken out and for Relative Strength to breakout of its downtrend. But a decent uptrend none-the-less. We will keep watching.