Consumer Staples ETF: A Sign Of More Market Weakness Ahead?

The strength in the Consumers strength ETF since the beginning of February may be a sign of things to come, while the strength in this sector is not always a guarantee of a weakening market, one cannot ignore the recent rise.

Generally defensive consumer staple stocks are laggards in a bull market, but the rise in this sector has to give the trader pause as to the markets general health and trend going forward.

Below is a chart of the Select Consumer Staples ETF (NYSE:XLP), traders can see the rise from the early February period thru today. Currently forming a bullish Reverse Head and Shoulders breakout formation, along with a volatility squeeze, could this sector be ready to breakout just in time for a market slowdown this spring?

A trader may purchase this ETF if and when it breaks out above the trend line or squeeze on heavier than normal volume. Slightly higher than normal implied volatility relative to its past may suggest selling spreads to collect premium. A put spread below the market or outright purchase of the ETF could be done.

Several stocks are also looking to breakout in this ETF. They are: Archer Daniels Midland (NYSE:ADM), PepsiCo (NYSE:PEP), Constellation Brands (NYSE:STZ) and Molson Coors Brewing Company (NYSE:TAP).

These stocks are either in a cup and handle formation or a combination of squeezes and head and shoulder patterns.

Lets take a look at ADM.

The chart below shows a very nice cup and handle formation setting up with a breakout high of 43.21.

Target on the breakout from cup low to high would be around the 48 area, not a bad move for a defensive stock. Waiting for a breakout on heavier volume a trader could take a position here. Outright stock purchase, call options or debit spreads would be one of several ways to trade this position.

As always these are suggestions for more research and study and not trade recommendations, risk is always a factor in these setups so size your trades to your own personal risk tolerance.

(Chart courtesy of Think or Swim)