Unlike the downtrend in the broader market, the utilities sector has been swinging widely inside a sideways pattern.
Currently, the Utilities Select SPDR Fund (XLU) is trading around the same price level as it was at the start of 2022. But XLU’s recent sell-off represents its tenth directional move for the year.
While that might put people off, this type of chart can create lots of trading opportunities.
When we last checked XLU on August 22 (red arrow on the chart below), it was in the middle of a major rally.
Today, we’ll see what’s happened since then as we go on the hunt for potential trades.
Multiple Big Swings
The chart below shows how volatile XLU has been in 2022.
The 10-day moving average (MA – red line) has crossed the 50-day MA (blue line) six times and is about to hit seven.
You can also see that those crossovers have been at sharp angles…
Utilities Select SPDR Fund (XLU)
Source: e-Signal
The other noticeable pattern is the action of the Relative Strength Index (RSI).
It has swung rapidly between its upper and lower bands (separated by the green line) as buyers and sellers have fought to determine XLU’s direction.
When we looked at XLU on August 22, I reiterated how important it is to be patient when we are looking for potential trade setups.
Although the RSI had been tracking in overbought territory (upper grey dashed line) earlier in the month, it had not yet made an inverse ‘V.’
Had we jumped into a short trade prematurely, we would have had to watch as XLU rallied against us. Only when the RSI inverted and started tracking back toward support did XLU also start to trend down.
Then, after the RSI tested and held support, XLU rallied… taking out its yearly high.
However, this new high was short-lived, as the chart pattern warned of a likely change in direction…
Utilities Select SPDR Fund (XLU)
Source: e-Signal
As you can see, while XLU was making a higher high (upper orange line), the RSI was making a lower high (lower orange line). When these two are moving away from each other, a change of direction is often in the cards.
Now, with the RSI breaking into the lower half of its range and the MAs about to cross once more, what can we expect from here?
A Defined ‘V’ Pattern
If the 10-day MA crosses down below the 50-day MA, then we know this is a bearish signal…
The sharper the angle of the crossover and the further the 10-day MA accelerates below the 50-day MA, then the larger this down move will become.
However, while this is a key technical signal, I’m watching the RSI even more intently right now…
The RSI is closing in on oversold territory (lower grey dashed line). And what happens around this level will have a big say in XLU’s future direction.
If the RSI flatlines or trades sideways around this level, then XLU’s current down move will likely have further to go.
However, if the RSI forms a ‘V’ and bounces – as it did in January, February, and June – then XLU could be in for a short-term bounce. And that would provide the setup for a brief, opportunistic long trade.
Just remember, though, that we need to see the RSI form a ‘V’ (and not just be in oversold territory) before looking to capture any up move.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
In today’s mailbag, subscribers thank Larry for their success with his various trading services…
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