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Can the Consumer Staples ETF Go Higher?

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Safe haven investment avenues have had a very important role to play in investor portfolios. Even the most aggressive of traders have had a decent exposure to relatively less volatile asset classes even though the objectives of each might differ (see Go Green with These 3 Clean Energy ETFs).

Sectors like healthcare or consumer staples are perceived to be safe haven plays because they have a lower realized volatility than other sectors and even the broader markets. Nevertheless, contrary to popular beliefs that safe havens do not perform well during a bull run, the Consumer Staples Select Sector SPDR ETF (XLP), has been in an uptrend like no other sector.

The above chart is a 6 month daily price chart of XLP. As we can see, the ETF has pretty much been in a very strong uptrend since the beginning of 2013. However, two very important aspects can be noticed in this pattern (see Natural Gas ETFs Continue to Soar).

First, the price action has been facing more volatility lately, as indicated by the higher tick size (red encircled portion) than what it faced at beginning of the year, as indicated by the lower tick size in the green encircled portion. Secondly, the ETF has been trading in the overbought territory pretty much since the beginning of 2013 as indicated by the Relative Strength Index and the Williams R indicators.

While these two facts viewed in isolation cannot give us a fool proof idea about the future course of action of the ETF, the following chart will surely give us a more educated guess about it.

The above chart is the long term price chart of XLP. While there is no doubt that the ETF has been amidst a very strong uptrend which accelerated at a stretch from the beginning of 2013, it finally seems that the ETF will be taking a breather.

The new induced volatility in the ETF coupled with poor earnings performance from the big companies in the sector, primarily hints towards a more imminent correction (see Weak PG Earnings Drag Down Consumer ETFs). Also, after such a strong uptrend, the upside for the ETF from current levels seems rather limited.

However, historically, the 50 DMA line has proved to be a very strong support line for the ETF on three previous occasions (three green circles) over the course of the last 5 years. This probably hints at the fact that the immediate downside for the ETF will be restricted to the 50 DMA line. However, the fall to the 50 DMA line is going to be a steep one this time around.

This is because this is probably the last leg in the XLP uptrend (since the beginning of 2013) which is also the most prominent part of the move. That is because this has been a high momentum channel, and one which has caused a huge disparity between its price and the 50 DMA support line (see Commodity Slide Hits Silver ETFs).

Therefore a drop to the 50 DMA line will surely hurt the investors this time around, and will likely suggest that new leadership is in the market.

Bottom Line

The consumer staples ETF could be facing some weakness ahead, as its run up has been quite impressive and it may be in need of a breather. The fund is in a deep positive trend though, so it will likely take more than a single bad earnings report—even from a massive bellwether like (PG - Free Report) —to shake XLP from its impressive trend.

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