Bearish Signals for Consumer Staples: Cramer's 'Off the Charts'

While there are many things going right for market bulls, prudent investors should pay attention to areas that aren't working, Jim Cramer told told his Mad Money viewers Tuesday.

To get a better sense of those disappointments, in his "Off the Charts" segment, Cramer spoke with Ed Ponsi, managing director of Barchetta Capital Management and a contributor to RealMoney.com.

In particular, Cramer and Ponsi looked at the consumer staples group, made up of such prominent names as Procter & Gamble (PG) , Coca-Cola (KO) , Pepsico (PEP) , Walgreens Boots (WAG) and Colgate-Palmolive (CL) .

They started by looking at Consumer Staples Select Sector SPDR ETF (XLP) , a broad measure of the group. While the broader stock market has soared to new heights, XLP is well off its highs. The ETF is basically flat since February, which is not horrendous, but certainly subpar. Ponsi believes that there are some potentially major bearish developments that could lead to a sharp decline in the consumer staples space going forward.

For starters, Ponsi points out that the consumer staples ETF has made a head-and-shoulder pattern recently, one of the most reliably bearish patterns in the book. Its appearance is often a sign that a nasty pullback is waiting in the wings. If the XLP goes down much further, the breakdown will likely have commenced.

In addition, the XLP's bullish trend line, which has acted as a floor of support for the XLP for roughly a year, is in danger of being violated. Right now, it's at $54 and change and so is the ETF. Any move much below this level could signal a whole new bearish trend.

Even worse, Ponsi notes that the consumer staples ETF is already trading below both its 50-day moving average and its 200-day moving average. Few chartists want to touch anything that's trading below both of those key measures of a stock's trajectory. Plus, the XLP's 50-day moving average is on the verge of crossing below its 20-day moving average, which would mean the short-term trajectory is weaker than the long-term trajectory. That very negative sign is commonly called the death cross.

So what's dragging down the XLP? Some of the weaker members of the consumer staples cohort are the producers and distributors of food, like Kraft Heinz (KHC) . The supermarket industry is in a difficult position thanks to savage competition, including competition from Amazon (AMZN) now that it's bought Whole Foods.

The daily chart of Kraft Heinz has been headed lower since June, and Ponsi points out that the stock has made a series of lower highs and lower lows, classic signs of a downtrend. Kraft Heinz made its own death cross at the beginning of August and since then the stock has rapidly sunk from $86 to $77.

Late last year, Kraft Heinz made a double bottom pattern and the stock launched from $80 all the way up to $97 in February. So it's not encouraging that Kraft Heinz broke down below $80 last month. Broken support is a worrying signal to technicians that a nasty decline is on the way.

Take a look at the daily chart of General Mills (GIS) , another classic pantry play

According to Ponsi, General Mills is caught in a bearish channel and the stock has been trapped beneath its 200-day moving average for an entire year. A chart like this says: slow, inexorable decline. General Mills recently broke down below its long-term support level at $53 and change. At $51, it's fallen through the floor and the bearish, downward sloping trading range shows no signs of easing up.

And consider the daily chart of J.M. Smucker (SJM) .

Once again, there is a bearish channel, with a pattern of lower highs and lower lows. Since Smucker's peaked in August of last year, the stock has lost roughly a third of its value.

If you want a healthy bull market, the consumer staples stocks are exactly the ones expected to lag. They are classic, recession-proof companies that investors buy when they're worried about a slowing economy. So the fact that they're being sold indicates that Wall Street is very confident about the future according to Cramer.

Over on Real Money, Cramer explains what impact he thinks Washington, tax reform efforts and Fed interest rate policy have on this market. Get his insights with a free trial subscription to Real Money.

Cramer and the AAP team are optimistic that the Broadcom (AVGO) - Brocade (BRCD) deal will eventually go through, helping Broadcom break out from this mixed trading pattern. Find out what they're telling their investment club members and get in on the conversation with a free trial subscription to Action Alerts PLUS.

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At the time of publication, Cramer's Action Alerts PLUS had a position in AVGO, PEP.