Technical analyst and portfolio manager Keith Richards of ValueTrend Wealth Management loves to trade Exchange Traded Funds that are stuck in sideways trading patterns.
I love sideways stock patterns. In fact, I named my book covering technical analysis, Sideways, after that very pattern since I’m such a fan. There are two ways to trade stocks or stock sector ETFs that are stuck in a sideways consolidation pattern.
You can buy at the bottom of the range (the support level) and sell at the top (the resistance level). 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 longer the base, the greater the case
Financials, eh? (and our neighbour’s too): The iShares S&P/TSX Capped Financials Index ETF (TSX—XFN) has been sideways since 2016. That’s a long time! The sector is concentrated.
Three banks (Royal Bank of Canada, Toronto-Dominion Bank and Bank of Nova Scotia) 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 between $35 and $39 a share fairly predictably since 2016. Note that I am using the non-dividend-adjusted chart feature on stockcharts.com 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 appear to be fairly intriguing too. The SPDR Financial Select Sector Fund (NYSEARCA—XLF) has a sideways pattern similar to that of the Canadian financials. They’ve been moving up on the near-termed charts. The next step is to bust resistance at around $28 per share, which has been containing the sector for the last two years. Certainly, this is one sector—on both sides of the border—to keep an eye on.
XLI is testing its ceiling near $80
Do you remember the song by Dire Straits called Industrial Disease? This sector, as illustrated by the SPDR Industrial Select Sector Fund (NYSEARCA—XLI) has been sideways since late 2017. Like the financials, it too is testing its ceiling of near $80 a share.
A breakout would be bullish. A failure to break out would suggest a trade if it returns back to the $72 support zone.
It’s pretty well-diversified with big names like Boeing, Honeywell and UPS getting relatively similar allocations. The sector has been an underdog but I note that we’re seeing some insider buying in many of the names that make up the sector.
Students of technical analysis might identify the pattern on the chart 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!
Keith Richards, President & Chief Portfolio Manager of ValueTrend Wealth Management, can be contacted at firstname.lastname@example.org. He may hold positions in the securities mentioned. The information provided is general in nature and does not represent investment advice. It is subject to change without notice and is based on the perspectives and opinions of the writer only. It may also contain projections or other “forward-looking statements”. There is significant risk that forward-looking statements will not prove to be accurate and actual results, performance, or achievements could differ materially from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements and you will not unduly rely on such forward-looking statements. Every effort has been made to compile this material from reliable sources; however, no warranty can be made as to its accuracy or completeness. Before acting on any of the above, please consult an appropriate professional regarding your particular circumstances.
This is an edited version of an article that was originally published for subscribers in the October 18, 2019, issue of Investor’s Digest of Canada. You can profit from the award-winning advice subscribers receive regularly in Investor’s Digest of Canada.
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