Is there a room for a further bullish rally?

The stock market in the US has been extremely bullish in the past 7 months. Actually, the main reason for that was the fact that investors saw the great market correction caused by the coronavirus pandemic as an amazing opportunity to start buying stocks at a huge discount. In fact, most of the biggest companies out there made corrections of between 30% and 70% in a month between the middle of February and the 20th of March, which represented a huge sell-off on the market that hadn’t been seen since the financial crisis of 2008.

Our stock and ETF analyses back in March clearly forecasted the great potential reversal from the low levels the market had reached back then and we were signaling for a strong buying activity at those levels.

Since then, we have seen most of the biggest companies out there make very strong bullish rallies of around 30-40% and signaling that the market has bottomed out already and investors have realized that those great corrections that have occurred have given them a great opportunity for owing leading companies with a proven market positioning and a solid financial performance at a huge discount, giving them an opportunity to make high profits as the market starts reversing again.

Thanks to our extensive knowledge and experience on the market, we have been helping our followers maximize the profitability in the short, middle and longer term. Let’s have a look at our results for the stocks we recommended for the month of September:

  • FB bought @ $247 – 7% return so far for 3 weeks
  • NFLX bought @ $475 – 13.5% return so far for 3 weeks
  • ATVI bought @ $77 – 7% return for 3 weeks
  • GOOGL bought @ $1,470 – 7% return for 3 weeks
  • CRM bought @ $240 – 12% return for 3 weeks
  • NKE bought @ $110 – 19% return for 3 weeks
  • ADBE bought @ $468 – 10% return for 3 weeks
  • SBUX bought @ $82.50 – 10.30% return for 3 weeks
  • PEP bought @ $132 – 8.3% return for 3 weeks
  • BAC bought @ $23 – 11.7% return for 3 weeks
  • AAPL bought @ $110 – 10% return for 3 weeks
  • DAL bought @ $28.50 – 15% return for 3 weeks

As you know, we at Dow Experts always base our analyses on both fundamental and technical factors that have an impact on the different stocks, ETFs and indices out there.

For example, we believe the fundamental factors, such as economic reports and events, political factors, healthcare issues, companies announcing their new products and services, as well as delivering their quarterly financial statements are of utmost importance when it comes to being able to come up with the most complete and thorough analysis on the different instruments we are looking at.
Furthermore, we use the power of technical analysis in order to examine the different patterns and price movements on the chart, such as trend lines, support and resistance lines and different price continuation and reversal figures, and that in a combination with the technical indicators give us an opportunity to determine the right levels at which we should buy or sell a given stock or ETF in order to maximize our profit potential.

Today’s analysis will focus on the 10-year positive correlation between the SPDR S&P 500 ETF Trust (SPY) and the Consumer Discretionary Select Sector SPDR Fund (XLY), which stands at 93%. We will also be looking at some of the biggest companies within the two ETFs and examine their latest performance in order to come up with some potential buying ideas at the significant corrections that have been taking place lately.

The SPY is the best-recognized and oldest ETF out there that tops rankings for the largest amount of assets under management and greatest trading volume.

The fund tracks the most popular US Index, the S&P 500 and invests in the large and midcap stocks selected by the S&P Committee.

The SPY has got assets under management of $284 billion at the moment and its average daily trading volume is $24 billion. In other words, it is an extremely liquid ETF that invests in the biggest companies within the S&P 500, giving an opportunity for investors to get an exposure to the most well-known companies out there without having to pick individual stocks by themselves – a very suitable option especially for less experienced investors.

By looking at the daily chart on the SPY, one could easily see the huge correction that was caused during the coronavirus outbreak where the price dropped from the $340 highs on the 20th of February to reach the lows at $220 a month later. The main reason for the drop during the coronavirus was caused by investors’ fear for the very likely recession coming within the economy, which was only logical taking into account the fact that the business started slowing down and lots of people lost their jobs because of that.

As we have already mentioned above, such a massive correction had not happened since the financial crisis of 2008 and investors have started realizing the great opportunity of buying at these low levels and maximizing their profit potential on the way up.

Therefore, as we expected the price started reversing back to the upside immediately after reaching the $220 lows to reach the $358-$359 highs in early September. In fact, it is important to mention that the SPY didn’t only recover the whole movement back to the upside and the correction that had occurred but also managed to climb above the $338 highs it had reached before the massive sell-off occurred back in February. The main reason for that is because most of the leading stocks out there have done an incredible job over the past 7 months and that has been boosting the market higher ever since the 20th of March when the market bottomed out.
After the massive bullish rally, logically the SPY made a profit-taking correction from the $359 highs to $320 following the overall short-term market correction in September. In fact, we had expected such a short-term drop on the market after that huge rally to the upside that lasted for 6 months without a decent profit-taking correction. However, the market didn’t stay low for too long. The SPY bounced from the strong support at $320 where lots of buying pressure took place and is already trading at $346. By looking at the chart and the recent movements on the market in general, we could say that traders and investors are positioning themselves for the upcoming earnings reports for the 3rd quarter of 2020 that would be coming up throughout the month of October and the beginning of November. In other words, market participants want to take advantage of that profit-taking correction that has recently occurred and take advantage of the great volatility that the earnings season usually offers and maximize their profitability to the upside.

The technical picture looks very favourable for the SPY. The price bounced from the $320 support where the 100-day moving average and the lower Bollinger band line matched perfectly with the support at that point, which led to an immediate bullish movement on the price. Moreover, the price broke the key resistance at $40 in the week ending on the 9th of October and that was a very strong bullish signal ahead of the big companies’ earnings reports coming out starting on the 13th of October. Therefore, we remain very bullish for the SPY and believe there is more money to be made to the upside.

As you know, we at Dow Experts have developed a correlation confirmation model that gives us a chance to identify great market movements that give us a chance to maximize our followers’ investment profitability. So, before we take any action on the SPY we need to make sure our bullish expectations are confirmed by the other ETF we are analyzing – the XLY, and only if we get a confirmation from it then we would proceed with buying the SPY. 

The Consumer Discretionary Select Sector SPDR Fund (XLY) is concentrated mostly on investing in the biggest companies within the consumer discretionary sector.  The XLY delivers a cheap and very liquid exposure to the biggest names within the sector, excluding small and mid-cap companies.

In fact, the XLY invests in companies, such as Amazon, Home Depot, Mcdonald’s, Nike, Starbucks, General Motors and others.

By looking at the daily chart, one could easily see the huge bullish rally that has been going since the market bottomed out around the 20th of March. In fact, the price has gone up from $82 to $153 and almost doubled in value in the past 7 months. In fact, the XLY has been one of the best-performing ETFs in the meantime. Similarly to the SPY, the XLY has kept on breaking a few key resistance levels to the upside and giving further bullish indications. The recent correction in September sent the price from the $153 highs to the key support mark at $140 where traders and investors realized that they have a great opportunity for buying the XLY at a 10% discount ahead of the earnings season. That by itself led to a massive buying activity and the price bouncing back up towards the current levels at $153. The technical indicators keep heading higher and giving further bullish indications. Currently, we are looking closely at the upcoming earnings reports starting from the 13th of October as they would be the most important factor that would have an impact on the future direction of the price.


Chart: XLY

We will wait for around a $3 drop on the XLY and start buying the leading ETF’s stock at the strong support at around $150. In case the price drops further in the short-term we would be interested in adding more to our buy positions at the next support mark around $140-$145. Our first take profit-target is set at $165-$166, followed by the next target at $175-$177 where we would be fully cashing in our profits and waiting for another pullback on the price that would give us a chance to buy again and make more money to the upside.

Overall, the recent performance of the XLY clearly confirms our bullish stance on the SPY and we would be interested in buying around the current levels, which would give us a chance to maximize our followers’ profitability to the upside.

Chart: SPY

We will start buying the SPY at around $340-$343, just above the key support (broken resistance) at $339. In case the price drops further we would be interested in adding more to our buy positions at the next key support at $332 where we would be able to get a better average price and further maximize our profitability to the upside. Our initial take-profit target is at $360, followed by the next target at $375-$380 where we would be fully closing our positions and collecting profits.

In order to help our followers maximize their profitability, we have decided to analyze the performance of some of the biggest companies within the two ETFs (SPY & XLY).

You can find them in our Stock Picks for October rubric.

Sincerely,

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