The Industrials SPDR (XLI) has struggled in 2018 and is pretty much unchanged year-to-date. Despite flat performance this year, a pair of bullish continuation patterns are taking shape. Let's look at the key levels to watch going forward.
Long-term, the trend is still up because the PPO(50,200,0) is positive, which means the 50-day EMA is above the 200-day EMA. The ETF also recorded a 52-week high in January.
The first continuation pattern is a large falling wedge. This pattern represents a correction after the big advance from October to January (~22%). The falling wedge retraced around 2/3 of this advance as the ETF reversed course in the 70-71 area. XLI then broke above the wedge line and exceeded the April high. This bullish breakout reverses the wedge decline and signals a continuation of the prior advance.
The second continuation pattern is a flat flag. XLI surged 7% in May and then consolidated with a sideways trading range. Flags are typically continuation patterns and a break above flag resistance would signal a continuation of the May surge. This would target a challenge to the January high.
My bias is bullish for XLI and now I need to set the level for a re-evaluation. The flag low and the wedge breakout zone mark the first support level to watch for a failure. A close below the flag lows would negate the flag and invalidate the wedge breakout.
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- Arthur Hill, CMT
Senior Technical Analyst, StockCharts.com