Consumer Discretionary ETF and Amazon Are Buys
In this article I will outline why the Consumer Discretionary Select Sector SPDR Fund (XLY) and Amazon.com, Inc. (AMZN) are both buys. Let’s start by looking at XLY.
Chart 1 – Consumer Discretionary ETF with 30 Week EMA, PPO, Volume, and Relative Strength
Chart 1 shows XLY on a weekly price chart. When I analyze stocks and ETFs, I like to start with price action. XLY peaked in November 2021 above $210 and then started to decline with the overall bear market. XLY lost its 30-week moving average in January 2022 and then made a series of lower lows and lower highs. This is the textbook definition of a down trend. Lower lows were made in February, June, and December of 2022 while lower highs were made in January, March, and August. From a price action standpoint, things changed after the December 2022 low. XLY rallied back above its 30-week moving average and was able to stay above that moving average for three weeks. Then XLY began to retrace. XLY dropped to $135 in March 2023 where it found some institutional buying. This can be seen in the third pane of Chart 1 where the weekly volume is shown. The amount of volume traded that week was the most seen for about one year. XLY then rallied back above the 30-week moving average and has held that moving average since. XLY has been above the 30-week moving average for the last eight weeks. That hasn’t happened since 2021. Now the 30-week moving average is starting to trend higher. XLY closed the week above the declining trendline outlined in green which is another bullish price action signal.
Momentum for XLY is bullish. This can be seen in the top pane of Chart 1. The Percentage Price Oscillator (‘PPO’) is a momentum indicator that is easy to understand. When the black line is above the red line that shows bullish momentum. When the black line is above zero or the centerline, that shows sustained bullish momentum. When PPO is bullish buyers have momentum on their side. PPO doesn’t predict price movement. It helps understand how strong momentum is for the underlying security. Right now, PPO is bullish and PPO is above the centerline. This combination of momentum was last seen in late 2021.
The bottom pane of Chart 1 shows the price ratio of XLY to the SP 500 index along with its 30-week moving average. When the price ratio is rising that shows the XLY is outperforming the major index. When the price ratio is falling that shows that XLY is underperforming the major index. Right now, XLY is turning higher and its 30-week moving average is flattening out, which it often does before it starts to trend higher. XLY is outperforming the major index which is what I want to see in stocks or ETFs that I am interested in buying.
In summary, XLY is now trending higher and price action is bullish. XLY has bullish momentum and has received some institutional buying support. It is now outperforming the broad market. Not all is perfect with this setup. I would prefer more bullish volume and I want to see XLY close higher than the January 2023 high that touches the green trendline. That would change the script from lower lows and lower highs to higher lows and higher highs. However, there are enough bullish signals to initiate a small position in XLY.
Now let’s look at AMZN in Chart 2 below.
Chart 2 – Amazon Weekly with 30 Week EMA, PPO, Volume, and Relative Strength
The setup for AMZN is just like XLY above. AMZN peaked in July 2021. Then AMZN started its downtrend of lower highs and lower lows. That downtrend ended in January 2023 when AMZN hit a low of $81.43. AMZN then rallied into late January piercing its 30-week moving average. AMZN then put in a higher low March. Later that month AMZN again regained its 30-week moving average and has mostly traded above that level since then. The 30-week moving average is now trending higher. AMZN closed above its previous high set in March of this year. Price action looks bullish to me.
Momentum looks strong. PPO is bullish. Black has been above red since January and black has been above the centerline for the past couple of weeks. Momentum is on the side of the bulls.
Volume has been okay. You can see several weeks where bullish volume has been above the 10-week moving average for volume.
As for relative strength, like XLY, AMZN is showing outperformance and the 30-week moving average for the price ratio is now flattening out.
In summary, AMZN has many bullish qualities I look for when I buy a stock. AMZN has reversed its downtrend and is now making a series of higher lows and higher highs. Momentum sides with the bulls. There is evidence of institutional buying support and AMZN is now outperforming the SP 500 index.
In both setups, there are enough bullish signs for me to have a position. I own AMZN already and I may start a position in XLY this week. However, you need to have exit plan in case the trade doesn’t work out. For me that is selling the position if it closes below its 30-week moving average. I also make sure that I am risking no more than 2% of my account equity in any one trade. That risk management rule allows me to be able to absorb a loss without doing major damage to my account. I can stay with positions as they rise with the 30-week moving average and then exit the position when the trend shows sign of reversing.