A good buying opportunity?

The stock market in the US has managed to restart its strong uptrend after the huge sell-off caused by the coronavirus between the 20th of February and the 20th of May when we saw it bottoming out after losing 35-40% of its value.

Since then, the market participants have been buying actively and that has caused the huge upside appreciation on all major stocks, indices and ETFs out there.

Dow Experts’ detailed fundamental and technical analyses have helped our followers benefit from the great correction on the market that sent the biggest ETFs and stocks at huge discounts. Our analyses in March clearly indicated our bullish expectations and we have been signaling a very likely bullish reversal from the lows back then. Well, that’s exactly what happened and the market has gone up more than 40-50% since then.


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, the situation with the coronavirus had shown some improvement across the globe and that has also been the main reason for the huge bullish rally among the leading stocks and indices out there. Lately, the cases have increased again and that is due to the fact that countries have started lifting the lock down, allowing people to go back to work, socialize, go to public places and meet others, as well as some countries opening their borders. It was quite logical though that that would lead to some more affections of the COVID-19. As we have mentioned in previous analyses, the virus is expected to stay around for some time, at least before an official vaccine has been produced. Many companies out there are currently working towards producing the so highly demanded vaccine that would finally be able to deal with the virus.

The fact that the COVID-19 cases have increased again across the globe lately has also had a negative impact on the stock market and was one of the reasons for the recent correction we have seen on the major stocks out there.

Technical Analysis

By looking at the daily chart of the XLP, we could easily see that the leading ETF managed to bottom out from the $47 lows on the 23rd of March after the huge sell-off 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 reversal afterwards where the price managed to reach the $61 highs on the 8th of June, which represents a 30% bullish appreciation in the past 2.5 months. Therefore, it was only logical to expect some profit-taking correction to the downside that has already occurred, sending the XLP towards the current levels at $58. In fact though, the $57-$58 mark has been a very strong support in the past 4-5 weeks since the beginning of May. After the initial spike from the $47 lows in March, the price managed to hit the $60-$61 on the 17th of April, led by a profit-taking correction, sending the price towards the support at $57-$58 where lots of further buying activity took place and the price failed to break that key support level to the downside, bouncing back up towards the resistance at $61. In fact, the $57-$57.50 has been a strong support level for a few years now and has been bringing lots of bullish interest around that level. Therefore, a lot more buying pressure is expected as the price has already reached that key support mark, which would bring the price back up in the near future.

Due to the huge rally to the upside, the technical indicators had already gone towards the overbought territory and had started giving selling indications. Currently, the RSI is trading at around 45 and it is about to cross up not too far from the oversold territory at 30, giving further bullish indications.

Moreover, the 23.6% Fibonacci retracement is matching perfectly with the strong support at $57-$58, giving further buying indications and a likely bullish reversal 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 easily see the massive uptrend that has occurred since the 23rd of March when the price started bottoming out from the $73 lows to reach the $104 highs in the first week of June. In other words, the leading ETF has appreciated with 42% over the past 2.5 months. Due to the massive bullish movement, investors have started collecting some profits at the $104 highs and we have been observing a profit-taking correction in the past week that has already sent the price towards the current levels at $97. Yet, by looking at the chart, one could clearly see the strong support level, currently standing at $96, which has been bringing lots of buying pressure in the past. In fact, the price has struggled to break that key support level to the downside for 4-5 weeks now since the beginning of May. In other words, there tends to be quite a lot of buying pressure every time the price reaches the strong support mark at that point where investors take advantage of the short-term correction to the downside and that gives them a chance to buy at a discount and follow the strong uptrend that has been formed in the past few months. Similarly to the XLP, the technical indicators have already gone closer to the oversold territory and have started giving some indications for a lack of much further downside potential. The lower Bollinger band line is close to the key support at $96, while the 23.6% Fibonacci retracement level matches with the support at that point, giving further bullish indications. We can also see that the price has struggled to close a candle below the $96 support for a few consecutive days now and started bouncing from that level on every attempt to break it to the downside, signaling for a lack of further downside potential from the current levels. Should the price break the first strong support at $96 it would be heading towards the next key support mark at $93.50 where a lot more buying pressure is expected and the price is likely to reverse back to the upside from either of these two levels.

Chart: XLV

We will start buying the XLV at the first key support line at $96 where lots of buying pressure is expected. Should the price break that level to the upside we will be buying more aggressively at the next key support at $93.50 where we will be able to get a better average price. Our initial profit-taking target is set at $101, followed by the next target at $105 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 discount and make more money to the upside.

The price action of the XLV clearly confirms our bullish stance on the XLP and we will be interested in adding these leading ETFs to our portfolio, which would also give a chance for our followers to maximize their profitability to the upside.

Chart: XLP

We will start actively buying the XLP at the $57.50 support. Should the price break the support at that mark, we will be interested in adding some more to our portfolio at the next key support mark at $56, which would improve our average cost basis and give us a chance to further maximize our profitability to the upside. Our first profit target is set at $60, followed by the next target at $64 where we will be fully cashing in our profits.



We at Dow Experts enjoy analyzing the market and helping our followers maximize their profitability by following our trading and investing ideas, which are always supported by our rational investment approach.

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 SPY and XLY that have a big impact on the overall performance of the two ETFs.

In order to help our followers maximize their profitability, we have analyzed the performance of some of the biggest stocks within the XLP & XLV that have a big impact on the overall performance of the two ETFs.

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Sincerely,

Sincerely,

Dow Experts

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