I love sideways stock patterns. In fact, I named my second book covering Technical Analysis after that pattern. There are two ways to trade stocks or stock sector ETF’s that are stuck in a sideways consolidation patter. You can buy at the bottom of the range (support) and sell at the top (resistance). Or you can buy on the breakout after the consolidation.
Two sectors that have been stuck in fairly long consolidation patterns are the Canadian Financials and the US Industrials. Let’s take a look at their charts.
The iShares Canadian capped financial index (XFN-T) has been sideways since 2016. That’s a long time! The sector is concentrated. Three banks (RY, TD, BNS) make up half of the ETF. The balance of the ETF includes other banks, insurance, and even asset management companies. The ETF has been trading $35-$39 fairly predictably since 2016. Note that I am using the non-dividend adjusted chart feature on stockcharts to identify the breakout point. That’s because this sector pays fairly high dividends, which can distort technical patterns when you are using dividend reinvested price charts. At this moment, it looks to be testing that $39 ceiling. Will it break out? If it does, it will be a candidate for a nice move up. The longer the base, the greater the case, as they say. If the sector fails here, it will be a trading stock that becomes attractive again near $35.
Interestingly, the US financials are looking interesting too. The SPDR Financial sector ETF (XLF-US) has a similar sideways pattern as the Canadian financials. They’ve been moving up on the neartermed charts. The next step is to bust resistance at around $28, which has been containing the sector for two years. Certainly, this is one sector—on both sides of the border- to keep an eye on
Do you remember the song by Dire Straits called “Industrial disease?” This sector, as illustrated by the SPDR Industrial sector ETF (XLI-US) has been sideways since late 2017. Like the financials, it too is testing its ceiling of near $80. A breakout would be bullish. A failure to breakout would suggest a trade if it returns back into the $72 support zone. Its pretty well diversified – with big names like Boeing, Honeywell and UPS getting relatively similar allocations. The sector has been an underdog – but as I noted on this blog last week, we’re seeing some insider buying in many of the names that make up the sector. You keeners out there might identify the XLI pattern as a Head & Shoulders setup. That setup, if real, becomes legit only after the neckline breakout of around $80. Again, this is one we ought to keep an eye on!
I’m at the MoneyShow this Friday!
Don’t forget to register early for the MoneyShow in the Metro Toronto Convention Center. I’m presenting this Friday September 20 at 4:15PM on something a little different. I’ll talk about trading capitulation candidates–higher risk/return plays. I’m looking forward to this talk! Here is a link to register, and find out more about my talk. Pre-registering doesn’t cost you anything, and helps you avoid the registration lineup.