This Rally Has Stalled… So What’s Next?

Given its regular, inflation-adjusted income flows, investors might have expected the Utilities Select SPDR Fund (XLU) to be less volatile than other sectors in 2022.

However, when we checked last month (red arrow on the chart below), XLU had been through some pretty big swings.

Especially over the last couple of months…

After hitting its all-time high in September, XLU reversed sharply in October. It then dropped and took out its yearly low.

That huge reversal represented a 23% fall in just a month.

However, that dramatic sell-off pushed XLU right into oversold territory. And I wrote last month that a snapback rally could be in the cards.

XLU did come back off its lows. So today we’ll see what’s in store as we roll into the end of the year…

A Common Reversal Pattern

You can see XLU’s high level of volatility in the chart below.

The 10-day moving average (MA – red line) has crossed the 50-day MA (blue line) multiple times at steep angles… and in both directions.

Take a look…

Utilities Select SPDR Fund (XLU)

Source: eSignal

We should also note the action of the Relative Strength Index (RSI)….

XLU’s big swings have coincided with the RSI reversing out of oversold territory (lower grey dashed line) or overbought territory (upper grey dashed line).

Look at the rally from late February (oversold) to April (overbought), where XLU reversed after peaking…

The big reversal from XLU’s September high also coincided with another common RSI pattern…

As XLU was making higher highs (upper orange line), the RSI was making lower highs (lower orange line) out of overbought territory.

We know that when stock price and the RSI diverge, a change of direction is not far away.

And that’s what we saw.

Take another look at the XLU chart…

Utilities Select SPDR Fund (XLU)

Source: eSignal

That RSI reversal pattern set up XLU to drop off a cliff and take out its yearly low.

Yet, after this, the RSI and XLU’s price made a similar pattern (though this time on the oversold side) that warned of a potential bounce…

While the XLU stock price was still falling and making lower lows (upper red line), the RSI had already bottomed and begun making higher lows (lower red line).

This is what set off a change of price direction and the bounce from mid-October into this month.

However, that rally has recently stalled with the RSI (red circle) tracking right on support/resistance (green line).

So what can we expect from here?

Signs for a Clear Break Higher

When the RSI showed a similar stalled pattern from June to July, XLU’s stock price tracked sideways and then slightly lower…

Then, when the RSI decisively broke into the upper half of its range, XLU rallied strongly. The strength of that upward move saw the 10-day MA cross strongly above the 50-day MA and accelerate higher.

If that pattern repeats here, then we can expect XLU to rally strongly into the end of the year.

The key is to be patient and only enter a potential long trade when the RSI makes a clear break higher.

However, if the RSI is unable to gain traction in the upper half of its band (and instead drifts below support), then XLU’s current rally will also peter out and roll over…

That would mean a retest of XLU’s October low could soon play out.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

Reader Mailbag

In today’s mailbag, a One Ticker Trader member shares his thoughts…

Hello Larry,

Your service is so popular that I responded not half an hour after receiving your alert through your app – but the calls were already over $5.65. You obviously are doing something right! Best wishes.

– Peter A.

Thank you, as always, for your thoughtful comments. We look forward to reading them every day at [email protected].