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Consumer stocks may turn hot after cold start: Technician

It's been a rough start to third-quarter earnings, with a bulk of companies reporting lackluster results. In fact, 51 percent of the companies that have reported have missed revenue targets, according to Thomson Reuters.

However, one highly regarded technician sees opportunity in one hot sector sector: consumer discretionary.

"It's the sector with the strongest trend of all groups especially versus the S&P 500," said Ari Wald of Oppenheimer on CNBC's "Fast Money" this week. According to Wald's chart work, the S&P 500 Index has seen a lot of technical damage after breaking its four-year uptrend. The benchmark is facing a lot of resistance to break above its 200-day moving average, and struggling to get back to its first-half levels.

First-quarter levels "have been resistance for the S&P 500 and support for consumer discretionary," said Wald.

Still, Wald says that "hands down, it's still our favorite area. We have the most conviction here."

Unlike the S&P 500, consumer discretionary has held its uptrend, in part due to the outperformance of components like Amazon, Under Armour and Nike. Wald said the sector has better momentum, less resistance and more support.


"Seasonal time of the year to play for discretionary," he said.

Generally, markets as a whole are strong in the fourth quarter, and according to Wald's chart work, consumer discretionary stocks are often big gainers in the period. It's the second-best performing group and typically has outperformed the S&P 500 since 1990, according to Wald.

Next week will be one of the busiest weeks for earnings — and for the sector — with a slew of stocks including Nike, Chipotle, Amazon, McDonald's and Under Armour all out with reports.

"All signals point to consumer discretionary. We think that's the group to own," Wald said.