At the start of this month, we took a close look at the Health Care Select Sector SPDR Fund (XLV).

Although XLV had been in an uptrend for over 12 years, it was going through a period of consolidation… which is typical in any long-term uptrend.

After a period of rallying, a stock pulls back or trades sideways before going on to rally again.

Many traders focus only on the up moves…

But sideways markets provide plenty of opportunities to trade in both directions.

The aim is to capture some of the moves and countermoves within the overall sideways trend.

Recently, XLV held onto a key level…

So, today I’m going to scope out some potential trades ahead.

Let’s check out XLV’s chart…

Health Care Select Sector SPDR Fund (XLV)

Source: eSignal

Our two moving averages (MA) show XLV’s current sideways pattern.

Since mid-September 2021, the 50-day MA (blue line) has been trading sideways with the 10-day MA (red line) zigzagging across it.

When we looked at XLV on May 3 (red arrow), it was retracing lower off its April high and showing some bearish signals.

The Relative Strength Index (RSI) had just broken into the lower half of its band (green line), and the 10-day MA was about to cross down over the 50-day MA.

With XLV in a downtrend within the sideways pattern, I was looking to see if XLV could hold a key support level (lower orange line) at ‘A.’

Because if XLV broke below that support – a level that held for around eight months – we could expect further falls ahead.

But, XLV tested that support at $125 and held.

That coincided with the RSI forming a ‘V’ and rallying from just above the oversold level (lower grey dashed line) in the bottom half of the chart.

So, now that the RSI closed right on resistance, what am I expecting from here?

Well, let’s take another look…

Health Care Select Sector SPDR Fund (XLV)

Source: eSignal

The orange line ‘B’ shows XLV’s short-term resistance in its current up move from its support level ‘A.’

If XLV breaks through resistance at ‘B’ – and the RSI breaks back into the upper half of its range and stays there – then this current up move has further to go…

And this could provide the setup for a potential long trade.

The next test is for XLV to break above the 50-day MA at around $134.

The 10-day MA crossing back above the 50-day MA would then add further momentum to any up move.

However, the action around the RSI’s resistance is key.

In both February and March 2022, the RSI showed a similar pattern…

Although the RSI briefly broke above the green line in both cases, it soon ran out of momentum and both moves faded out.

If a similar pattern repeats with the RSI – and XLV fails to break above short-term resistance at ‘B’ – then XLV could quickly reverse and soon retest long-term support at ‘A.’

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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