After rising close to 160% from the lows in March 2009 to the highs in early May this year the industrial stocks as a group as measured by the Sector SPDR Industrial ETF (ARCA: XLI) have come under pressure and broken the blue up-trend line, which is a development worth noting.
The early July new highs in the transportation sector were not matched with new highs in the industrial sector, signaling weakness. Historically transports have been a leading indicator, hence this development is also worth noting.
On the daily chart dating back to October 2010 note the head & shoulders pattern in place, which broke its neckline at the $35 mark last week. The target of the head & shoulders pattern here could be as low as the $31 area. We measure this by taking the distance from the head to the neckline, and subtracting it from the neckline.
Yesterday the Sector SPDR Industrial ETF (ARCA: XLI) also closed with an engulfing candle/outside day on daily chart, signaling further weakness and potential to eventually slide towards $31. Important to keep in mind however is that these types of head & shoulders pattern don’t often reach their ultimate target in a straight line. Especially with an official debt deal vote still to be done tonight a relief rally could easily lift the Sector SPDR Industrial ETF (ARCA: XLI) back towards the $36 area before ultimately heading lower again.
The key to this trade will be the entry point. Should a further relief rally occur and depending on where one goes short the Sector SPDR Industrial ETF (ARCA: XLI), stops could be placed between $36 and $36.50 with the ultimate profit target near $31 but scaling out of the trade along the way.