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Larry’s note: Welcome to Trading with Larry Benedict, my free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
Investors often view the utilities sector as a hedge against inflation.
Because regulators allow utilities companies to increase fees and charges when inflation rises, the sector is less vulnerable to inflation.
But while rampant inflation and higher interest rates have been a major story for the past six months, the Utilities Select SPDR Fund (XLU) has been trending higher for much longer…
The current uptrend in XLU goes back to when it bottomed out in March 2020 along with the broader market.
Rather than going back to the start of the trend, today we’ll concentrate on just the last 12 months or so. More importantly, I’ll show you how to trade it.
To begin, consider the long-term 50-day moving average (MA – blue line) in the chart below…
Utilities Select SPDR Fund (XLU)
Source: eSignal
The 50-day MA shows XLU in a long-term uptrend. While there have been retracements during that move, the overall trend has been up.
You’ll also notice that the 10-day MA (red line) has crossed back and forth over the 50-day MA.
While the 10-day MA crossing above the 50-day MA is typically confirmation of an uptrend (and vice versa), often it can be too much of a laggard when you’re trading inside a range…
Meaning that soon after entering a trade (based on an MA crossover) it hits resistance (or support) and heads back the other way.
That’s why I also look to the Relative Strength Index (RSI) to identify a change in direction. Especially when the stock is tracking close to support (lower orange line) or resistance (upper orange line)… as XLU is doing now.
So, let’s take a look at the RSI in the lower portion of the chart…
Utilities Select SPDR Fund (XLU)
Source: eSignal
When XLU made a higher high from ‘A’ to ‘B’, you’ll notice the divergence with the RSI. The RSI made a lower high (from 1 to 2) indicating a potential (and later confirmed) change in direction…
Had we waited for the 10-day MA to cross down over the 50-day MA to confirm a downwards signal, we would’ve ended up entering the trade as much as two weeks later… and around halfway through the move.
You can see an almost identical pattern with ‘C’ and ‘D.’
Again, the divergence between the RSI (lower high) and XLU’s share price (higher high) led to another change in direction. And the potential to get in early on a short trade.
While both these opportunities occurred around resistance, there’ve been similar potential trades around support…
At ‘5’, ‘6’ and ‘7’ – where the RSI bounced out of oversold territory (below the lower grey line) – the RSI provided an early signal of a potential long trade.
If you had waited for the 10-day MA to cross back above the 50-day MA for an entry signal, you would have missed out on the major part of the move.
Note that when we last checked out XLU earlier this month (red arrow), the RSI had just rallied strongly off ‘7.’ And, as the chart now shows, it subsequently took another couple of weeks before the 10-day MA crossed above the 50-day MA (signaling an uptrend).
Right now, with that rally taking XLU back up close to resistance – and the RSI into overbought territory (above the upper grey line) – we’re going to see if this pattern repeats for a third time.
Again, my focus will be on the RSI…
Of course, when it comes to the markets there are no guarantees.
However, if XLU hits resistance and the RSI forms an inverse ‘V’ (and starts to head lower), then that pattern could be another strong setup for a short trade.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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