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THE BEAUTY LIES IN THE RELATIVE TRADE...

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Last week, and so far this week the stock market has traded rather dismal to be sure, with the S&P 500 trading lower in 8 of the past 9 trading sessions. However, regardless of this weakness, we've begun to see slow, but sure movements beneath the surface that warrant our trading attention. To wit, the S&P Energy sector appears ready to resume its upward trend against the S&P Consumer Discretionary sector. In other words, Energy is expected to outperform Consumer Discretionary. As for our chart target: we could very well see the ratio trade upwards of 2.3 to 2.4 in the months ahead.

Xle-xly_8-5-11

From a technical point of view, let's note that prices have consolidated in bullish fashion since January-2011, and have done so with prices faltering from the longer-term 130-week moving average and back into the more medium-term 40-week moving average. Moreover, this bullish consolidation implies higher prices ahead towards the 2.3 to 2.4 level beneath trendline resistance, especially given the ratio continues to hold at the 40-week moving average. But the gains could be even more material given prices will have broken out above the larger 130-week moving average, solidifying the trend higher for months and perhaps years ahead. Lastly, the 20-week stochastic has turned higher in bullish fashion through its trigger point; confirming momentum is rising.

Therefore, given the developing evidence: we believe being equal buyers of energy stocks and equal short sellers of consumer discretionary shares makes sense...regardless of market direction. The beauty lies in the relative trade.

Good luck and good trading,

Richard Rhodes

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