Despite its boring reputation, the utilities sector has experienced plenty of swings in 2022.

And the biggest swing of all came this past month…

On September 12, the Utilities Select SPDR Fund (XLU) was trading at its highest level so far this year. But then a near-vertical sell-off pushed XLU to a new yearly low.

This type of volatility often sends investors running for the exit. Yet as traders, we know volatility creates opportunity.

So, with XLU about to retest a key technical level, I want to look for potential trade setups ahead…

Steep Crossovers

The chart below shows XLU’s high level of volatility.

As you can see, the 10-day moving average (MA – red line) has now crossed the 50-day MA (blue line) seven times this year – five of those nearly vertically…

Utilities Select SPDR Fund (XLU)

Source: eSignal

Usually, these steep crossovers occur when a stock is tanking. However, in XLU’s case, these crossovers occurred in both directions.

Big swings in momentum cause chart patterns like XLU’s. And while these patterns remain, we could generate plenty of profitable opportunities trading XLU both long and short.

Another noticeable pattern is the action of the Relative Strength Index (RSI)…

The RSI has swung multiple times from one extreme to the other – from overbought territory (upper grey dashed line) to oversold (lower grey dashed line), and vice versa.

The trick is to try and catch one of these moves when the RSI rebounds out of either overbought or oversold territory. You want to avoid getting caught somewhere in the middle…

This past month’s action shows how quickly a small loss could turn into something bigger.

When we last looked at XLU on September 27 (red arrow), the RSI was dipping down into oversold territory…

Utilities Select SPDR Fund (XLU)

Source: eSignal

There were two potential scenarios…

1. If the RSI failed to bounce and instead meandered sideways, XLU would continue its downtrend.

2. Or if the RSI formed a ‘V’ and bounced out of oversold territory, XLU would also bounce higher.

Although the second scenario played out, XLU’s bounce only lasted a couple of days – resulting in a brief trading opportunity.

Now, the RSI is falling back into oversold territory. So what can we expect from here?

Taking Profits

Right now, we’re again waiting on one of those two scenarios to play out.

If the RSI fails to bounce and instead tracks sideways, there will likely be further weakness in XLU’s stock price ahead.

But if the second scenario plays out, I’ll be watching for potential trades. The chart shows us that when the RSI forms a ‘V’ and rebounds strongly, XLU can snap back strongly the other way.

In late February, the RSI broke strongly through resistance (green line), causing XLU to rally 13% in around two weeks. And even though buying momentum petered out around resistance, XLU rallied by a similar amount in June.

If the RSI snaps higher from this current level, that could provide the opportunity for another brief but profitable long trade.

Just remember, momentum can swing on a dime. So, we must take any profits off the table when we see them.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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