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Larry’s note: Welcome to Trading with Larry Benedict, my free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. And, I’m featured in the book Market Wizards, alongside investors like Paul Tudor Jones. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
2022 has been a tough time for investors…
Rising interest rates, high inflation, and a war in Ukraine have seen the major indices take a big tumble.
However, not all stocks and sectors perform the same…
The Utilities Select SPDR Fund (XLU) initially fell with the rest of the market at the start of 2022. But in March, it turned around and rallied 20% to its all-time high.
That’s because utility companies are seen as an inflation hedge. So, they can increase their fees and charges when inflation rises higher.
But after rallying to its recent high, XLU shares are now under selling pressure. In the past couple of weeks, XLU dropped by almost 10%.
Today, I’m going to discuss what’s next for this sector.
Let’s take a look at XLU’s chart…
Utilities Select SPDR Fund (XLU)
Source: eSignal
After a decline in late February, XLU rallied strongly in early March. Then, after consolidating through March, XLU rallied again until it peaked in April.
Our two moving averages (MA) can gauge the strength of that rally…
The short-term 10-day MA (red line) broke strongly above the long-term 50-day MA (blue line). Then, it continued to move higher and further away from the 50-day MA.
When we last checked XLU in late March (red arrow), we were looking for a potential reversal.
At the time, XLU was closing in on resistance. Plus, the Relative Strength Index (RSI) indicated XLU was overbought.
It took another couple of weeks before divergence (orange lines) between XLU’s share price and the RSI, could indicate a potential change in direction.
And that’s what led to this recent fall. Take another look…
Utilities Select SPDR Fund (XLU)
Source: eSignal
After reversing from overbought territory, the RSI broke through support (green line) and pulled down XLU’s share price with it. Our two MAs are now quickly tracking toward each other.
Although the MAs could soon cross back down again, it’s the RSI that’ll indicate XLU’s next direction.
On the chart, the three red circles show when the RSI was previously in oversold territory. That’s on or below the lower grey dashed line.
XLU rallied after each time the RSI formed a ‘V.’
Now that the RSI is closing in again on the lower grey line, I’ll be looking for this pattern to repeat.
A bounce out of oversold territory could provide a setup for a quick, long trade. We only need the RSI to trade back toward resistance to pick up a tidy profit.
Remember, with our style of trading, we’re not aiming to hit it out of the park.
Doing so would be a low-probability way to trade – especially when the markets are as volatile as they are now.
Instead, we look for stocks that have run too far in either direction.
Once those stocks revert to their mean, we then aim for a nice quick profit. And this is exactly what we’ll do in a potential trade with XLU.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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