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Larry’s note: Welcome to Trading with Larry Benedict, the brand new 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… |
The healthcare sector experienced enormous pressure at the height of the pandemic.
Hospitals delayed (or canceled) non-essential surgeries to make room for patients with COVID-19, and healthcare staff worked around the clock to give their patients the best medical attention.
Now, hospitals can catch up as Omicron cases trend down. But even before COVID, the demand for health services was growing…
With age and population increasing (the number of seniors increased by over a third from 2010 to 2020), the demand for health services continues to grow.
Despite the pandemic, the Health Care Select Sector SPDR Fund (XLV) is now in the 12th year of its rally.
But with any rally, there are always pullbacks (or a period of consolidation) along the way.
While these periods have typically preceded the next run higher for XLV, they can still provide plenty of trading opportunities in either direction.
As you can see in the chart below, XLV is going through a consolidation (sideways) phase.
The long-term trend – represented by the 50-day moving average (MA – blue line) has generally been trading flat. Take a look at the chart…
Health Care Select Sector SPDR Fund (XLV)
Source: eSignal
Having retraced from its high in August 2021 (A), XLV found support at around $125. After rallying into its all-time high in December (B), XLV fell back again to re-test (and hold) that same support level.
When we checked out XLV earlier last month (red arrow), it rallied off that support level.
But soon after that, the rally fizzled out…
Although the Relative Strength Index (RSI) briefly pierced through resistance (50% – horizontal green line) it soon returned to the lower half of its channel… And that dragged XLV’s share price back lower.
The trading session opened just below support on the day of the Ukraine invasion (February 24), and XLV began to rally higher. Right now, it’s still early in this move.
But the most important catalyst for this rally lies with the RSI.
Let’s take another look at the XLV chart…
Health Care Select Sector SPDR Fund (XLV)
Source: eSignal
Since the beginning of 2022, the RSI remained below the green resistance line. For the uptrend to gain momentum, the RSI will need to break above that resistance and stay there. Meaning that the RSI resistance turns into support.
If the RSI can hold support, that could provide an opportunity to go long. The next test for XLV is to break above its most recent high from February 9 ($134.46).
From there, we would need to see the 10-day MA (red line) break above the 50-day MA for XLV to have a chance to re-test its all-time high ($141.97).
The success of any long trade relies on the RSI breaking into the top half of its channel.
If the RSI tests resistance and rebounds lower, then we can expect to see a new wave of selling. This provides a setup for a potential short trade. We would then likely see XLV once again re-test its key support level.
While the long-term trend for XLV is up (and has been for 12 years), it doesn’t mean we can only trade from the long side.
But with volatility picking up and XLV still consolidating, nimble traders will have plenty of opportunities to trade it in both directions.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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