Does A Triple Top In XLP Signal The End Of The Bull Market

The markets have been red hot since the stock market crash of 2008/9. The Fed has been the main catalyst for the markets with their unyielding purchase programs. Many stocks have benefited from the Fed's insatiable appetite for risk assets. But what is going to happen to the markets when the Fed begins to taper their massive bond buying campaign?

Today's installment from the series, 'Trading Lessons From A Hedge Fund Trader' will focus on Consumer Staples Select Sector SPDR fund XLP as per our reader's request for research, available here on BehindWallStreet.com.

The trading behavior from September 18, 2013, AKA the Fed day, was very important technically and quantitatively and it could possibly be the sign that the stock market is ready to change direction and start going down.

Now how can 1 day, September 18, 2013 make such a big difference? 

We all know that the Fed is the main catalyst behind the market's surge and we all have heard the saying, 'Don't fight the Fed'. The Fed surprised the markets with the news it wouldn't begin reducing its bond-buying program. The markets rallied on that news for one day and then sold off after that.

The 1st trading lesson is this: when you get unexpected news and the market behaves as it is suppose to (going up on good news, going down on bad news) then the market is in gear. Put simply, when we are in a Bull Market and we get unexpected news that is perceived as good then the market should go up and continue to go up. But when we are in a Bull Market and get unexpected good news and the market can't sustain more that a single day's rally then you have a clue that the market is not as strong as you think it is.

Now let's layer in another clue as to why the market isn't as strong as you think it is.

Consumer Staples Select Sector SPDR fund XLP is a good barometer as to the overall health of the economy. The Consumer Staples Select Sector SPDR fund XLP invests in dividend machine, conservative blue chip companies in food and staples retailing, household products, food products, tobacco, beverages and personal products. Essentially all the things you will have to buy in order to survive. When these defensive companies start breaking down technical it can be a very bad omen for the market.

Consumer Staples Select Sector SPDR fund XLP has formed a triple top and the Fed day was the move that sealed the deal.

The triple top in technical analysis is a very powerful reversal signal. 

Now let's layer on the Fed News Event Trading Strategy to get a sense as to why a triple top in NYSEARCA:XLP is really bad news.

Here's a quick lesson on the Fed trading strategy. Quantitatively, the Fed day is an important day statistically  and the actual trading day itself has a high probability for launching sustainable trends. The High and Low for NYSEARCA:XLP was $41.50 and $40.70. We will wait for the first Closing price that is outside of that band and we will go in the direction of that move.

The Fed day move faked the market out by showing strength in the next day's morning session but faded to the close of the day. The first close outside of the Fed band was below $40.75 so we should be biased  to the downside.

The 2nd trading lesson is this: learn a little bit from every analytical discipline such are fundamental, technical, quantitative so you can put all the moving parts together. The more clues you have about the current market environment the better odds you'll have to pick the path of least resistance. Notice how I said the path of least resistance. We should be willing to go long and short as to what the market has to offer us.

Conclusion

Consumer Staples Select Sector SPDR fund XLP has been a market darling moving from $17 in 2009 to $41 in 2013. That is an unsustainable move when you consider the defensive holdings in the fund.

The recent triple top, the unexpected good news bad behavior, the Fed news not being enough to propel NYSEARCA:XLP when the Fed is the main catalyst in the market, they all point to a top in NYSEARCA:XLP and the general market.

If you would like to know how we would create a trading strategy using funds like Consumer Staples Select Sector SPDR fund XLP, then check our ETF Total Return Newsletter. 

This is a cursory look at Consumer Staples Select Sector SPDR fund XLP  and we are not making any specific buy or sell recommendation but merely voicing our opinion of the current situation. Each individual investor must conduct their own due diligence of both the company, the market sector as well as their own financial situation and risk parameters.

By Joel Laceda - September 27, 2013 BehindWallStreet.com