For a sector that some might consider mundane, utilities has moved around a lot since the start of 2022.
In fact, the Utilities Select SPDR Fund (XLU) had six moves in just six months.
Yet, despite all these moves and countermoves, XLU is now trading back where it was in January.
For a buy-and-hold investor, this type of market can be frustrating and stressful.
But for a pragmatic trader, it can throw up plenty of trading opportunities.
When we checked XLU back on June 30 (red arrow on the chart), it was in the thick of its sixth major move for the year.
Today, I’m going to update you on what’s happened since then. And we’ll scope out potential trading opportunities from here.
Let’s look at XLU’s chart…
Utilities Select SPDR Fund (XLU)
Source: eSignal
The two moving averages (MA) show just how much XLU moved since the start of 2022.
The short-term 10-day MA (red line) criss-crossed the long-term 50-day MA (blue line) five times in just six months.
Plus, the 10-day MA traded at wide gaps to the 50-day MA (like in April and June) which is a further sign of volatility.
However, today I want to concentrate on the Relative Strength Index’s (RSI) action.
In the bottom half of the chart, the numbers (1-3) represent the series of lower highs the RSI made in 2022.
The first of these highs ‘1,’ coincided with XLU’s peak in April. And ‘2’ matched XLU’s lower high in June.
The most recent of these peaks ‘3,’ coincided with XLU’s lower high at the start of July. We know this is a common bear pattern.
While buying momentum can create a countermove against the major downtrend, it peters out at a lower level each time – causing the stock to peak at a lower high…
Just like in this case with XLU.
Take another look at the chart…
Utilities Select SPDR Fund (XLU)
Source: eSignal
While XLU may have peaked at ‘3,’ it’s the RSI that’ll determine where the stock price heads from here.
So, what am I looking at from here?
When the RSI peaked and reversed at ‘1’ and ‘2,’ it tracked sideways before heading down.
Then, as the RSI fell, XLU also followed it down.
However, while the RSI has peaked and inverted, it’s still tracking sideways and is right on top of support (green line).
Meaning, the current down pattern is not yet complete.
If the two previous patterns repeat (the RSI breaks lower and into the bottom half of its range), then that could provide a strong setup for a short trade.
If that setup plays out, a long-term move down could see XLU retest its yearly lows (orange line) from February and June.
However, a clear break below RSI’s support is vital for any down move and short trade to play out.
When a stock is highly volatile like XLU is right now, it might seem too difficult to trade.
But by sticking with proven indictors and studying previous patterns, we can put the odds in our favor.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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