Discretionary income is the amount of money left over for investment spending, or saving after paying for the necessities such as food, shelter, clothing, and taxes. Companies that the first to benefit from consumer spending have been particularly affected in the course of the sars coronavirus pandemic of people around the world to stay at home and keep a closer eye on their savings only a few months ago.
In this article, we will take a look at several charts that traders use to track consumer discretionary spending and try to determine where the price could be headed over the next few weeks or months.
Consumer Discretionary Select sector SPDR Fund (XLY)
Traders often turn to the popular exchange traded products such as Consumer Discretionary Select sector SPDR Fund (XLY) when trying to get an idea of where a specific segment of the market is headed. As you can see on the chart below, the sector of the consumer discretionary sector has been trading along a well-defined uptrend until it breaks below the key levels of support on the worries of the coronavirus at the beginning of March. The strong bounce off the bottom at the end of March has led many traders begin to speak of a continuation move higher.
At this point, the followers of technical analysis will probably want to take note of several levels of resistance between $120 and $130, and how they could stand in the way of a major move higher. More specifically, traders will be also likely to want to take note of the bearish crossover between the 50-day and 200-day moving averages, which is common to long-term sell signal. This bearish crossover between the long-term moving averages is commonly used to mark the beginning of a major downward trend, and it will probably be used by bears in the determination of the location of stop-loss. Bullish traders may want to stay away until the price of the fund at the close above the trend line or until other technical indicators show signs of an upward movement.
Starbucks Corporation (SBUX)
One of the top holdings of the XLY ETF, which greatly benefits from the consumer discretionary spending is the part of Starbucks Corporation (SBUX). As you can see below, the recent bounce from the lows in March has sent the price towards the resistance of the 200-day moving average (red line), and the influence of horizontal trend line.
These guides will likely be used by bears during the placing of orders, and represent a strong resistance to any form of major movement to the upside. Bearish traders will also likely look at the connection between the 50-day and 200-day moving averages, and mark the beginning of a long-term downward trend.
Nike, Inc. (NKE)
Another top holding of the XLY ETF, which could capture the attention of active traders is Nike, Inc. (NKE). As you can see on the chart below, the model looks almost identical to the ones mentioned above.
The increase to the combined resistance of the dotted trendline and its 200-day moving average are key indicators for the bulls who are looking to enter the market. Based on the principles of technical analysis, the price of the share during the next several sessions will be a strong indication of the amount of movement that will dominate the trend over the weeks ahead, and the followers of the technical analysis will probably be held at a bias to the downside until the indicators suggest otherwise.
The Bottom Line
The consumer discretionary sector has been hit hard by the downturn in the economy due to the sars coronavirus pandemic. The sharp rise in recent weeks has many traders talking about a move higher. However, based on the maps discussed above, near resistance levels and the decline in crosses between long-term moving averages suggest that prices could be headed lower over the next few weeks.
At the time of writing, Casey Murphy did not own a position in any of the assets mentioned.