The economy is having everything thrown at it right now…

Multidecade high inflation – along with rapidly rising interest rates – is causing consumers to tighten the holds on their wallets.

On top of this, global geopolitical events add a massive layer of uncertainty… No wonder most stocks have been heading down all year.

However, despite the gloom, the health care sector has held up relatively well. No matter what else is going on, people value their health — something further reinforced by the COVID pandemic.

That’s why, when many sectors were tanking, the Health Care Select Sector SPDR Fund (XLV) was hitting its all-time high. But after retracing from there, XLV has traded in a sideways pattern.

Now buying momentum has recently increased. So today, I want to see what’s in store from here…

Falling Through Support

The chart below shows how XLV was rallying as we came into the new year…

Then, after pulling back through January and February, XLV rallied from March. It hit its all-time high in April at ‘A.’

Let’s take a look at the chart…

Health Care Select Sector SPDR Fund (XLV)

Source: eSignal

That rally faltered, however, when the Relative Strength Index (RSI) reversed sharply from overbought territory (upper grey dashed line). And that sent XLV lower.

Then, the downtrend picked up speed as the RSI broke down through support (green line) into the lower half of its range.

It briefly broke back up through resistance in May. But then the RSI rolled over and headed lower again. This action coincided with XLV falling heavily down to its June low at ‘B.’

Yet this time, the RSI formed a ‘V’ from oversold territory (lower grey dashed line) and broke up through resistance. Thus, XLV rallied from those lows…

Take another look…

Health Care Select Sector SPDR Fund (XLV)

Source: eSignal

When we last checked XLV on August 17 (red arrow), we saw how that rally had gained further momentum with the 10-day moving average (MA – red line) bullishly breaking back above the 50-day MA (blue line).

However, that rally petered out. The RSI lost traction in the upper half of its band.

As the RSI fell through support, the 10-day MA crossed back below the 50-day MA. And XLV began to trend lower.

That downtrend ran out of steam as the RSI again bottomed out in oversold territory. That enabled XLV to find a short-term base (the orange line).

Since then, the RSI has continued to track higher, making a series of higher lows (bottom red line). And now it has broken strongly into the upper half of its range.

So what am I expecting from here?

An Emerging Uptrend?

If the RSI can gain traction in its upper band, then this will add further momentum to XLV’s emerging uptrend.

The longer the RSI can stay in this upper range, then the more pronounced this rally could become. However, it’s still too early to tell with this move.

The other thing I’m watching is our MAs…

In another bullish sign, XLV’s stock price recently broke above the 50-day MA. That is dragging the two MAs closer together.

If the 10-day MA can break above the 50-day MA, then the bigger this up move could become. The next test would then be for XLV to take out its recent August high at $134.47.

But as always, let’s keep a close eye on our technical indicators…

If the RSI reverses again or the 10-day MA starts accelerating lower, then any up move will likely be short-lived.

Regards,

Larry Benedict
Editor, Trading With Larry Benedict

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