Consumer Discretionary Looks to Have Some Mojo

When looking for setups I like to see multiple timeframes aligned supportive of the same conclusion. Consumer Discretionary stocks (XLY) appear to be in position to rally substantially from here. I know, I know the market is extended too far for any more upside to occur and we are going to crash any day now. Well quite frankly underlying Sectors and stocks don't suggest that posture currently.

Looking at XLY on multiple timeframes it has the structure in place to put the risk reward in our favor.

Monthly

The setup always should start with the Monthly chart. The structure here is very positive. Price continued to test the 81-82 resistance for much of 2015 and then all of 2016. Each test of this resistance was followed by a "higher low" pullback. As they say, the more times a level is tested, the more likely it is to be broken. This works for both support and resistance.

Each time a resistance level is tested people sell the stock because that tends to be a high probability trade, to sell into resistance. Every successive test of the level fewer and fewer sellers exist at the area, supply of the stock is drying up. This also works for buyers at support levels; when a stock trades down to a support level new buyers step in. Each time the stock returns to the support fewer and fewer buyers want more of the stock because they are simply running out of money and patience with a stock that makes little headway. Eventually demand becomes weakened and the stock breaks down.

I prefer to trade at the areas of support and resistance where the imbalance shifts. I'm always watching for the place where sellers wear out and also where buyers breakdown. The momentum that can follow such a change in trend is often very powerful.

Currently XLY is in the process of expanding higher after sellers have weakened.

Weekly

Another key principle of supply and demand is once a level is broken it tends to act as a new floor or ceiling for prices on subsequent tests. This is called polarity and a throwback or retest of the prior breakout should hold this new level.

XLY made multiple peaks over the past 18-months and in November broke through those highs, shifting the balance between buyers and sellers. Buyers are trying to take control of the stock and change the intermediate-term trend.

At the end of the year price revisited the prior resistance level but coming from above resistance rather than below. The first week of January showed polarity as buyers stepped in to support the stock and confirmed the change in trend. A bull flag pattern was triggered and this week we saw initial follow-through on that pattern. This is a high probability pattern and should not be ignored.

Daily

Gap resistance from December which contained the price action for the last 4-weeks has now been reclaimed with this Friday's firm move. Thursday was a Hammer bar off the 20 Day SMA and Friday's follow-through confirmed the rejection of lower prices.

Hourly

If we zoom into the intraday action on the Hourly chart we can see the structure of this "retest or throwback" move. The action has formed yet another bullish pattern; an Inverse Head/Shoulder formation is now in motion which adds additional confirmation to our bullish thesis.

It is a very good sign when price patterns on multiple timeframes all confirm the same thinking. We always want to see this alignment. It doesn't mean prices have to go higher, but the odds tip considerably in our favor when they do so.