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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… |
Whether it’s dealing with the global pandemic or caring for a growing and ageing population, one thing stays the same …
The demand for healthcare services continues to rise year after year.
When we checked out the Health Care Select Sector SPDR Fund (XLV) just over a month ago (red arrow on the chart below), we saw how this sector had been in an uptrend for over 12 years.
Since that rally began back in 2009, XLV’s share price has increased six-fold.
While the overall trend has remained up, it hasn’t always been one-way traffic. There have been plenty of times when XLV traded sideways as it consolidated before its next move higher.
And these periods can throw up plenty of trading opportunities… as it’s doing now.
In the chart below, XLV is currently going through another one of its consolidation periods.
Since September 2021, the 50-day moving average (MA – blue line) has been tracking sideways.
Check out the chart…
Health Care Select Sector SPDR Fund (XLV)
Source: eSignal
Having peaked at ‘A’ from its original rally, XLV rolled over and retraced before finding support at $125 (orange line)…
Then after making a higher high at ‘B,’ the same pattern repeated with XLV retracing. After finding support again, XLV tried to rally.
But, this rally faded out by mid-February.
Despite briefly breaking above resistance (green line), the Relative Strength Index (RSI) fell back into the lower half of its band – a bearish signal.
When XLV bounced off support on March 2, I wrote that the most important catalyst for a rally depended on the RSI…
The higher high from ‘1’ to ‘2’ meant that the next test for the RSI was to break back into the upper half of its range above the green line.
And that’s exactly what we saw…
With the RSI breaking above resistance, we saw the 10-day MA ( red line) cross back above the 50-day MA. This confirmed the uptrend.
After recently making another higher high at ‘C,’ we can see that the RSI formed an inverse ‘V’ from overbought territory (upper grey line) and is now heading back toward support.
So, how are things going to play out from here?
Well, a big part of that depends on the RSI…
Health Care Select Sector SPDR Fund (XLV)
Source: eSignal
If the RSI soon tests support and holds – remaining in the upper half of its band – we can expect this current selloff to lose momentum.
That would then give XLV the chance to form a new support from which it could rally higher. That would set us up for a potential long trade.
The next test would then be for XLV to make another higher high at what would become ‘D’…
However, if the RSI fails to hold support and again breaks into the lower half of its band, then this current retracement still has some way to go.
In this rangebound period, that means we have the potential to see a reversion back to XLV’s long-term support at $125, and a potential short trade.
We know that XLV’s long-term trend has been up. However, that doesn’t mean we have to trade it in only one direction…
As the chart shows, when XLV goes through a consolidation phase – there are plenty of opportunities to trade it profitably in both directions.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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