A profit-taking correction has recently occurred. Is it a good time to start buying?

The US stock market has been in a massive uptrend since the 20th of March after the huge sell-off that took place starting on the 20th of February until the middle of March. In fact, the 35-40% correction we saw back then was caused by the coronavirus’ spread all around the world, leading to an economic slowdown and a massive fear among traders and investors. Therefore, market participants started selling their stakes mainly based on fear because of the global economic uncertainty in the future.
Yet, that gave us an amazing buying opportunity in the end of March where all our favourite stocks made huge corrections to the downside and that was a perfect buying opportunity for us, which in turn managed to maximize our followers’ profitability to the upside.

Ever since the market bottomed out on the 20th of March this year, we have seen an immediate bullish reaction and a huge uptrend, taking place until the beginning of September. In fact, the market has already gone up more than 60% since the huge sell-off back in February-March.

Dow Experts’ detailed fundamental and technical analyses have helped our followers benefit from that great correction and the huge bullish rally that followed ever since. Thus, we would like to congratulate our followers who managed to take advantage of all these great opportunities and maximized their profitability to the upside.

The market has already made a bit of a profit-taking correction since the 3rd of September. In other words, investors have been collecting profits in the past week after the huge bullish rally that took place in the past 6 months.

Today’s analysis will focus on the 10-year positive correlation between the Consumer Staples Select Sector SPDR Fund (XLP) and the Health Care Select Sector SPDR Fund (XLV), which is standing at 75%. We will also be looking at some of the biggest companies within the two ETFs and evaluate their recent performance in order to come up with potential buying ideas that would give a chance for our followers to benefit from the great bullish rally that has been taking place on the market in the past 3 months.

The Consumer Staples Select Sector SPDR Fund (XLP) tracks a market-cap-weighted index of consumer non-discretionary (staples) stocks drawn from the S&P 500. The XLP represents the performance of the biggest players within the sector, such as Procter & Gamble, Coca-Cola, PepsiCo, Walmart and others. In fact, XLP’s expense ratio ranks among the cheapest in the sector. Moreover, it has got $14.2 billion in assets under management and an average daily volume of $722 million, making it a very attractive investment opportunity that gives an exposure to one of the biggest sectors within the US economy that has actually been very attractive for investors over the years. The reason for the sector being so attractive is because of the essence of the products the companies within that sector offer – non-discretionary. In other words, the sector is concentrated on selling products of utmost necessity and needed for a customer’s daily life. Therefore, those stocks most of the times tend to perform well even during bad times on the market and therefore give investors more security and bring lower risk on their investments.

From a fundamental point of view, we need to mention that the coronavirus is still out there and we are far from getting out of this situation. It is a fact that many companies and countries are working hard towards producing a vaccine, which is expected to come around in 2021. However, it is still quite uncertain what would happen next – whether there will be a second wave worse than the first one, how are different countries going to deal with social distancing and whether they will lock their borders and taking all sorts of different precautions. This part is quite unclear and uncertain yet as we don’t know what the future development of the virus will be on a global scale.

Technical analysis

By looking at the chart of the XLP, we could see that the leading ETF managed to bottom out from the $47 lows on the 23rd of March after the huge correction that sent it down from the $65 highs a month earlier (28% correction).

Yet, the huge correction has given investors a chance to own one of the leading ETFs and biggest non-discretionary stocks at a huge discount that would then help them maximize their profitability to the upside. Therefore, we have seen lots of buying interest at those low levels at $47-$48, leading to a massive uptrend ever since where the XLP managed to reach the $67.61 mark on the 3rd of September, representing a 44% increase in less than 6 months. It is important to mention that the bullish rally that has occurred on the US stock market in the past 6 months is not something regular and such massive bullish movements don’t really occur very often in such a short period of time.

In other words, bulls have been making great profits and maximizing their profitability to the upside.

It was only logical that the huge bullish rally in the past 6 months would motivate many buyers to collect their profits and that’s exactly what happened on the 3rd of September. Many investors who managed to benefit from the extraordinary bullish rally have decided to sell their stakes and that led to a quick profit-taking correction in the past week.

Therefore, the price dropped from the $67.61 high to reach the $63.89 low 5 days later.  By looking at the daily chart, one could easily see the strong support mark at the $63.80 from which the price started bouncing on the 20th of August after a similar profit-taking correction of around $1.20 where traders started buying aggressively at that key support mark and pushed the price higher afterwards.

As soon as the price hit that strong support mark traders started buying immediately and that led to the price failing to break that level to the downside.

Furthermore, the lower Bollinger band line matches with the support at that point, giving further bullish indications. The RSI and Stochastic indicators have also started reversing to the upside and will soon be giving more buying signals as well. Moreover, the 38.20% Fibonacci retracement level matches perfectly with the key support at $63.80, giving more reasons to believe the price will bounce again from that level.

Dow Theory 2.0: Correlation Confirmation

As you know, we at Dow Experts have developed a correlation confirmation model that allows us to identify great market movements that give us a chance to maximize our followers’ investment profitability.

Therefore, before taking any action on the XLP, we need to make sure our bullish stance is confirmed by the other ETF we are analyzing – the XLV. Should we get a clear confirmation by the XLV, only then we would proceed with buying the XLP.

The Health Care Select Sector SPDR Fund (XLV) dominates the US health care segment on practically every measure. The XLV is not only the oldest and largest fund in the segment, but its extensive trading volume and liquidity makes it an unparalleled leader in the segment. The leading ETF has got $26 billion in assets under management and an average daily volume of $1.12 billion. Moreover, it is relatively cheap amongst its peers, making it a very affordable and at the same time attractive investment.

The XLV is concentrated on investing in the biggest stocks within the health care segment, such as Johnson & Johnson, Merck, Pfizer, AbbVie and others.

By looking at the daily chart of the XLV, we could see the huge bullish rally that has occurred since the 23rd of March. The price bottomed out from the $73.54 lows following the overall bullish sentiment and breaking a few key resistance levels on the way up, such as the $87, $92 and $96 to reach the $109.74 highs on the 3rd of September. In fact, that represented an overall return of 49%, which is slightly better than the XLP’s performance over the past 6 months since the coronavirus correction took place.

Actually, the XLV chart looks almost the same as the XLP. The price started correcting some of its gains based on a profit-taking interest in the past week, leading to a correction from the $109.74 highs to reach the key support mark at $103.80 (5%). Yet, as in the case of XLP, the XLV price failed to break and close a candle below that key support at $103.80. The technical indicators such as RSI and Stochastics have gone to the oversold territory already, while the lower Bollinger band line matches perfectly with the support at that level, giving bullish indications to follow up on.

Therefore, our bullish stance on the XLP is clearly confirmed by the XLV and we believe the recent profit-taking correction is giving us a chance to buy at a nice discount and at a very strong support level, which would in turn maximize our followers’ profitability to the upside.

Chart: XLV

We will start buying the XLV at the key support level at $103.80 where lots of buying pressure is expected. Should the price break that strong support mark and drop further, we will be adding more to our buy positions at the psychological support at $100 where further buying activity is expected to take place and the price is expected to bounce from either of these two levels. Our initial profit-taking area is at $109 below the $110 resistance, followed by the longer-term target at $115 where we will be fully cashing in our profits and waiting for another profit-taking correction that would give us a chance to buy again at a strong support and make higher profits to the upside.

Chart: XLP

We will start buying aggressively at the key support mark at $63.80-$63.85 where lots of buying pressure is expected. In case the price breaks the support and drops further, we will be looking to buy more of the XLP at the next key support level at $61.50-$62 where further buying activity is expected to take place and the price is likely to reverse back to the upside from either of these two levels. Our first profit target is set at $66.50, followed by the next target at $70-$72 where we will be fully cashing in our profits.

In order to further provide our followers with a strategy on how to fully capitalize on the above-described patterns and correlations, we analyzed the performance of some of the biggest companies within the XLP and XLV that have a big impact on the overall performance of the two ETFs.


Sincerely,

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