A profit-taking correction. Is it the right time to buy?

By analyzing the overall stock market performance in the past 12 months, we should firstly mention the massive correction that occurred exactly a year ago, starting on the 20th of February, led by a massive sell-off caused by the coronavirus outbreak. In fact, the stock market lost around 35-40% of its value in less than a month. The main reason for the huge correction were the investors’ fears about the immediate economic slowdown that was expected to follow, caused by the virus and therefore investors started selling all there positions to cash in whatever they could and avoid losing money. At the same time speculators saw that as an amazing short-selling opportunity that would give them a chance to make money to the downside. Well, that’s exactly what happened and the market dropped dramatically in the next month where the biggest companies out there, such as Apple, Google, Facebook, Netflix, Amazon and others lost a huge portion of their market capitalization in only 3-4 weeks. Actually, that was a correction we hadn’t seen since the financial crisis of 2008 where the stock market lost around 50% of its value in less than a year.

Since the 2008 crisis the market had been in the longest uptrend in history – almost 11 years of rising prices. Well, that was quite impressive to say the least, but it was logical to see lots of selling pressure once the coronavirus started spreading around the globe last year, leading to a worse correction on the market compared to the one we saw in 2008, due to the fact that back then the market dropped 50% in 1 year while now we saw a correction of 35-40% in only a month.

Yet, as we have seen many times on the market, bad news is good news in many situations. In other words, the huge correction that occurred last year gave us an amazing opportunity to buy our favourite stocks at a massive discount – an opportunity we hadn’t have for almost 11 years before that. Logically speaking, smart money start flooding into the stock market and the market bottomed out immediately, leading to a massive uptrend that occurred in the next 9 months till the end of 2020. Moreover, one of the main reasons for the continuation of the strong bullish rally has been the strong financial results reported by the leading companies out there. By looking at the 4th quarter financial results, we shall say the leading companies managed to perform quite well even during the pandemic times and reported some very strong figures. That was quite impressive taking into account the global economic slowdown caused by the coronavirus.

Apple for example reported a record number of iPhone sales in the 4th quarter of 2020, while Tesla’s share price went up roughly 1500% in 2020. That is something worth mentioning, isn’t it?

We have been extremely bullish on the stock market after the correction in February-March and have been making high profits to the upside ever since.

However, we have been more cautious lately due to the fact that the market has been quite overbought especially in the past few months. Therefore, as we mentioned in our analyses in February, we preferred to wait for a bit of a profit-taking correction before we start opening any other buying positions. Well, it is good that we did so because our expectations for a further profit-taking correction actually happened – the stock market has been in a corrective mode in the past few weeks since February. However, that could be giving us some very good buying opportunities this month.

Moreover, we should mention the fact that all publicly traded companies would start reporting their Q1 2021 financial results in April. Considering the strong results in the past quarter, in case the leading companies out there beat analysts’ expectations again we would expect to see another strong bullish interest across the board and the stock market to rise quickly afterwards. Therefore, we are currently looking for such great opportunities to buy at a decent discount and maximize our profitability to the upside.

Today’s analysis will focus on the 10-year positive correlation between the Consumer Discretionary Select Sector SPDR Fund (XLY) and the SPDR S&P 500 ETF Trust (SPY), which stands at 93%. We would also be looking at some of the biggest companies within the two ETFs and evaluate their recent performance, which would give us a chance to come up with some potential investment ideas and be able to maximize our followers’ profitability in the current market environment.

As you know, the Dow Experts have developed a modern-market approach, based on the Dow Theory and created by Charles Dow more than 100 years ago. Yet, while the basic Dow Theory was based purely on the correlation between the Dow Jones Industrial Average and the Dow Jones Transportation Average, our modern-market approach is based on more than 30 correlations, including all the other key sectors on the market, such as Technology, Services, Consumer discretionary and non-discretionary, Financials, Energy and others. Moreover, our modern approach includes the importance of both fundamental and technical analyses because we believe using a combination of both is vital for one’s success and profitability on the market nowadays. The correlation-confirmation model we have developed gives us a chance to identify market reversals, as well as trend continuation patterns, which in turn give us specific buying or selling signals, giving us a chance to benefit from both bullish and bearish markets.

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 see the massive rally that has taken place on the SPY in the past year since the market bottoming out on the 20th of March 2020. It actually found lots of buying pressure after the huge correction to the downside that led to a massive bullish appreciation from the lows at $83. Due to the massive buying activity that took place, traders and investors kept on buying more and pushing the price higher, which formed the strong uptrend that has been going on the price ever since. Therefore, the price managed to rise to as far as $174 in the beginning of February this year. Since then, we have seen quite a lot of profit-taking interest taking place, which was quite expected though after such a massive appreciation in the past 11 months.

Going back to our analyses for February, we mentioned that we are expecting a potential correction from the current levels back then and we indicated that our followers could wait for a potential correction before taking any further action and buying the leading ETFs and stocks. Well, that’s exactly what happened and the market made that correction we had expected.

Currently, we could see a clear uptrend going on the chart again – a massive rally to the upside, followed by a profit-taking correction and then investors and traders start buying again at a strong support mark, following the overall bullish sentiment on the stock market. We are looking forward to the upcoming 1st quarter 2021 earnings results that would further indicate where the market would be heading next and there is only a few weeks left to go before the biggest companies start reporting their financial results. As we mentioned earlier, the Q4 2020 results were quite strong and in case the companies deliver similar figures now for this quarter then we would be expecting a lot more bullish rallies in the future.

The daily chart of the XLY shows how the price dropped on a profit-taking interest to test the strong support line at $156 and formed a bullish hammer figure at that key support level, indicating a lack of further selling pressure taking place. A hammer formation is a very good indication for a very likely upside reversal. That’s exactly what happened – the price started rising immediately and is already trading at $162-$163. The technical indicators, such as RSI, Stochastics and MACD are already crossing up in the oversold territory and giving lots of buying indications. Moreover, the lower Bollinger band line matches perfectly with the strong support at that level, signaling for a very likely further bullish movement in the near future. By taking into account the great performance of the XLY in the past 5 years, as well as the strong financial performance of the companies that the fund invests in, we believe the recent correction is giving us a great chance to start buying at around that key support and make high profits to the upside.

In order to further confirm our bullish expectations for the XLY, we have decided to analyze the recent performance of the SPY for a further clarification and an additional reference that would help us make a decision and take an action on the XLY.

By looking at the daily chart of the SPY, we could see the massive uptrend that had been going from March 2020 towards February 2021. The price faced a strong resistance at $393-$394 and failed to break that level. In fact, it followed the overall profit-taking correction on the market as we had expected and that led to a quick drop towards the strong support at $372. Yet, the price failed to break that level to the downside, due to the massive buying interest taking place at that level. So, once the price tested the $372 support it immediately started bouncing in the first week of March to reach the current levels at $387. In fact, the technical indicators have already bottomed out from the oversold territory and the RSI, Stochastics and MACD have already crossed up, giving further bullish indications. The 100-day moving average as well as the lower Bollinger band both match with the strong support at $372 and giving additional bullish indications.

Chart: SPY

We would wait for the price to drop a bit again and get closer to the strong support at $372 and start buying the SPY at around $374-$375, just above the key support mark. In case the price drops further, we would be interested in adding more to our buy positions at the next key support at $365 where more bullish activity is expected and it would give us a chance to get a better average price for our long positions. Our initial profit-taking target would be set at $388, followed by the next target at $400-$415 where we would be fully cashing in our profits and waiting for another correction on the price that would give us a chance to buy the leading ETF again at a decent discount.

By analyzing the recent performance of the SPY, we shall say it clearly confirms our bullish stance on the XLY and we would like to take advantage of the recent correction and add the XLY to our portfolio.

Chart: XLY

We will wait for the price to get closer and test the strong support at $156 and start buying at around $158-$160. In case it drops further, we would be interested in adding more to our long positions at the next strong support at $150 where more buying pressure is expected and would give us a chance to improve our average cost basis on the buy positions. Our first take-profit target would be set at $168-$170, followed by the next target at $178-$185 where we would be fully cashing in our profits.

In order to help our followers maximize their profitability further, we would analyze the performance of some of the biggest companies within the two ETFs (XLY & SPY). You could find them in our Stock Picks for March rubric.


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