Invest in Consumer Discretionary With This ETF (XLY, AMZN)

One of an active trader's primary goals is to identify opportunities that present the most ideal risk/reward scenarios relative to other assets. This often means being on the hunt for equities or exchange-traded funds that have experienced a pullback and are trading near key levels of support.

Interestingly, right now, one of the sectors best-positioned for a move higher is consumer discretionary. In the article below, we’ll take a look at several charts and see where strategic traders are currently placing their bets. (For more, see: Consumer Discretionary Sector: Industries Snapshot.)

Consumer Discretionary Select SPDR Fund

Companies that conduct business in the consumer discretionary sector are those that create products that are non-essential. This means customers will often buy products from these businesses when the economy is strong, and they have sufficient income to purchase them. Products such as apparel, movies, and automobiles are typical examples of discretionary items, and from a trader’s perspective, the companies that build and sell them generally outperform during market rallies.

Traders who are interested in gaining exposure to this sector may want to consider taking a position in the Consumer Discretionary Select SPDR Fund (XLY). This fund is comprised 87 of the top companies in the segment, and it has total net assets of 10.35 billion. Taking a look at the chart, you can see that the price trended higher for most of July, but has recently experienced a pullback toward the support of a major trendline.

Notice how the $80.50 level has acted as resistance for much of the past year, but now that the price is trading above, active traders would expect this trendline to now reverse its role and act as support. Based on technical analysis, the nearby long-term moving averages will also likely help limit the downside risk, so this fund will likely be on the radar of those traders looking for ideal risk-to-reward setups. (For more, see: Top Consumer Discretionary Stocks To Watch.)

Amazon.com, Inc.

One method for investing in top consumer discretionary companies is to analyze the holdings of key exchange-traded funds such as XLY. In this case, you’ll find that Amazon.com, Inc. (AMZN) makes up 12.70% of the fund’s allocation. Based on the chart below, you can see Amazon is also trading near key support, which is adding to the argument that there are ample trading opportunities within this sector.

Notice how the ascending trendline has provided support on each attempted pullback since mid-February. Active traders would expect this support to continue to hold and look to place buy orders as close to the 50-day moving average or trendline as possible in an attempt to make the most of the risk-to-reward. (For more, see: Is Amazon Going To Be Worth $6,000 Per Share.)

Home Depot, Inc.

When consumers have extra cash to spend, they often invest in renovating their homes. This is one of the key reasons that Home Depot, Inc. (HD) is an ideal investment within the consumer discretionary space. Taking a look at the chart, you can see that it looks similar to XLY above and is trading near a key long-term trendline. Active traders will watch for a definitive move above the trendline because several strong closes higher will signal a technical breakout and likely lead to a surge in momentum.

From a risk management perspective, most will likely look to protect their positions by placing a stop-loss order below the support of the lower trendline or 200-day moving average, which is trading near $128.38. (For more, see: Home Depot Moves From Good To Great.)

The Bottom Line

Consumer discretionary stocks and related assets tend to outperform when users find themselves confident about the future and flush with extra cash.

Based on the charts above, it appears that the moves toward key support levels are presenting traders with an ideal risk-to-reward setup and it wouldn’t be surprising to see this sector trend higher for the next several months. (For more, see: Now Is The Time To Buy Consumer Staples Stocks.)