Consumer Discretionary Sector Weakens

In this week’s Technical Market Outlook I noted that year-to-date the worst performing sector so far has been consumer discretionary ($XLY). The retail space as a whole has been under performing the market for several months now as traders have shown favor to the lower-beta sectors like utilities and health care. Today I want to focus on $XLY and the current chart setup.

In early March we saw the consumer discretionary sector put in a false break above its January high. Buyers were unable to maintain control as $XLY retreated back under $66 and continued to weaken from there. With the false break we saw a host of negative divergences take place. First, in the top panel of the chart below, we have the Relative Strength Index (RSI) which put in a lower high, a bearish divergence.

In the third panel of the chart I’ve included the Advance-Decline Line for $XLY. This tells us how the individuals stocks that make up the underlying index are performing. The Advance-Decline Lines rises when more stocks are heading higher than falling – which is a healthy sign of breadth for the sector. However, this did not happen with the Advance-Decline unable to find its January high, ultimately diverging from price.

When viewing a specific sector we want to see strong relative performance. That’s what the last panel of the chart shows. When the solid line is rising we know that $XLY is outpacing $SPY. But yet again, the ratio between these two ETFs made a lower high, unable to confirm the breakout in price.

All three of these metrics, momentum, breadth, and relative performance, have continued to weaken since the false breakout earlier this month. Traders do not seem to be showing signs of bullishness for this sector and with the latest price action, it doesn’t seem the mood is shifting anytime soon.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+, Twitter, and StockTwits.