The Key Levels of Support to Watch on XLI

The Industrial Select Sector SPDR Fund (XLI) began last week's trading perched just above $80 -- a round-number level that had marked peaks for the shares before they sliced through here in early November as a new round of U.S.-China trade headlines sparked optimism across Wall Street. The industrial-heavy exchange-traded fund (ETF) -- which includes trade-sensitive stocks Boeing (BA) and Caterpillar (CAT) as two of its top holdings -- went on to successfully test this region in the weeks leading up to the Dec. 15 deadline when the U.S. was expected to raise tariffs on additional Chinese goods, bringing in focus several other notable levels to watch on XLI.

First up is $84, which is two times the ETF's December 2007 peak. The fund stopped just shy of here on Nov. 26, when it hit a closing high of $82.50, roughly four times its 2002 lows. The shares pulled back quickly from here in early December as traders reacted to a negative reading on U.S. manufacturing data. However, XLI's retreat was neatly contained by its 40-day moving average -- a short-term trendline it toppled back in mid-October on reports of a potential meeting between U.S. President Donald Trump and Chinese leader Xi Jinping.

Also on our radar is the 200-day moving average, which, alongside the "under-the-radar" 320-day trendline, emerged as support during that mid-October retreat, cushioning XLI pullbacks since March. These trendlines are currently located at $76.99 and $75.16, respectively, while near here is $75.70, which is five times the fund's all-time low of $15.14, tagged during the March 2009 market bottom, and $73.29, home to the ETF's fourth-quarter lows and 20% year-to-date return.

As far as short-term options traders, out-of-the-money XLI puts have been preferred. Peak open interest among XLI options is found at the January 2020 75-strike put, with nearly 21,500 contracts outstanding, while the December 79 put is home to peak front-month open interest of more than 12,000 contracts. Looking back, the shares haven't closed south of $79 since Oct. 31, and haven't settled below that heavily populated 75 strike since Oct. 10.

This past Friday, Dec. 13, XLI shares climbed all the way up to $82.53 as the U.S.-China trade "overhang" was effectively lifted after Washington and Beijing agreed to a limited trade deal, which includes, in part, the U.S. scaling back existing tariffs on Chinese products in phases and China increasing purchases of U.S. agricultural products. The ETF eventually retreated from the site of its all-time closing high as details of the agreement were met with a muted response on Wall Street. This level, as well as all those referenced above, will be worth watching in the upcoming week, with new readings on U.S. manufacturing slated for release.

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, December 15.