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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… |
Last Thursday, gross domestic product (GDP) figures showed the economy contracted by 1.4%.
That’s way below market expectations of 1.1% growth.
And with the Federal Reserve set to announce a 0.5% interest rate raise on Wednesday, the economy’s health will be a bigger focus on investors’ minds.
However, one sector that people will always value – and that thrives regardless of the economic cycle – is healthcare.
That’s why the Health Care Select Sector SPDR Fund (XLV) has rallied for over 12 years now.
Luckily, you don’t have to trade XLV from only one direction.
When we last looked at XLV on April 14 (red arrow on the chart), we saw plenty of opportunities to trade it against the major trend.
Back then, XLV had just peaked to its all-time high at ‘A’ on the chart. It was also about to test a key technical indicator.
Today, I’m going to update you on how that panned out and what we can expect from here.
First, let’s take a look at XLV’s chart…
Health Care Select Sector SPDR Fund (XLV)
Source: eSignal
Since September 2021, you can see that XLV has been in a sideways pattern by the action of the two moving averages (MA).
The long-term, 50-day MA (blue line) is trending sideways and is where it was on September 2021.
The short-term, 10-day MA (red line) has zig-zagged across it multiple times and is now also around the same level it was on in September.
The Relative Strength Index’s action (RSI – lower portion of the chart), triggered XLV’s recent down move within this sideways pattern.
XLV’s high at ‘A’ coincided with the RSI making an inverse ‘V’ from overbought territory. That’s when the RSI is on or above the upper dashed grey line in the bottom half of the chart.
On April 14, the RSI trended lower and was about to test support (green line).
The RSI’s support level was key to XLV’s future direction.
If the RSI held support and remained in the upper half of its band, then XLV’s down move could run out of momentum.
But if the RSI broke support and moved into the lower half of its band, then we could expect the emerging downtrend to go further.
This downtrend is what we’re seeing now. Let’s take another look…
Health Care Select Sector SPDR Fund (XLV)
Source: eSignal
As the RSI broke below support, XLV followed it down. The 10-day MA could soon cross down over the 50-day MA – further evidence of a downtrend.
So, what can we expect from here?
Well, the orange line on the chart is a support level XLV has held multiple times since September 2021.
If the RSI continues to track lower, then XLV could test this support level at $125.
Over the coming week, I’ll be watching the action around this support level to see if previous patterns (red circles) repeat.
When XLV tested support – and the RSI formed a ‘V’ near oversold territory (lower grey line) – XLV enjoyed a sharp bounce.
If that pattern holds again, then we could have a nice long trade.
But first, XLV must hold support at $125. A break below that means XLV will fall further.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
Do you think the healthcare sector will continue to rally? Or will it eventually head lower?
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