|
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… |
One of the major themes of the market in 2022 has been the huge downward re-rating of tech stocks.
As we noted yesterday, stocks like Amazon and Tesla have fallen around 40% and 50% respectively so far this year.
However, it hasn’t been all bad news for investors…
Some sectors, like the Utilities Select SPDR Fund (XLU) have been heading in the opposite direction.
While the major indices were tumbling, XLU was making an all-time high.
But after making that high, buying momentum started to wane.
When we last checked XLU on May 4 (red arrow on the chart), it retraced around 10%.
At the time, I was looking to see if a previous pattern would repeat.
Today, we’re going to see how that move panned out and discuss what I’m expecting from here.
Let’s look at XLU’s chart…
Utilities Select SPDR Fund (XLU)
Source: eSignal
On the chart, you can see the strong rally that began in late February.
The 10-day moving average (MA – red line) broke above the 50-day MA (blue line) at a steep angle and continued to accelerate higher.
However, when the Relative Strength Index (RSI) tracked into overbought territory at the upper grey dashed line, XLU’s uptrend began to lose momentum.
XLU soon ran into resistance at the upper orange line marked ‘A.’
At the same time XLU hit resistance, the RSI made lower highs. The divergence between the stock price and the RSI led to XLU’s fall.
On May 4, we saw a pattern from September 2021 that repeated in January and February of this year.
Each time the RSI formed a ‘V’ out of oversold territory – at or below the lower grey dashed line – XLU went on to rally.
Since the RSI is closing in on oversold territory, I’m looking to see if this pattern will repeat yet again.
The most recent pattern (red circle) shows the RSI formed another ‘V’… but this time just above the grey dashed line.
From there, the RSI has continued to track higher.
This increasing buying momentum has enabled XLU to find support at the lower orange line marked ‘B.’
Take another look…
Utilities Select SPDR Fund (XLU)
Source: eSignal
Now that the RSI burst above resistance (green line) and XLU’s share price rallied strongly, what can we expect next?
Well, there are several key signals…
The 10-day MA could soon break back above the 50-day MA.
If the two MAs cross over, it would show further evidence of an emerging uptrend.
The next test for XLU would then be to break above the previous resistance at ‘A.’
This move would show that XLU’s long-term uptrend (shown by the 50-day MA) remains intact.
However, I’ll also be watching the RSI now that it’s closing in on overbought territory again.
If XLY can break above resistance at ‘A’ before the RSI inverses, this will add further evidence of XLU’s uptrend.
It will also mark another fresh, all-time high.
But we need to remain extremely vigilant…
If the RSI inverses and tracks lower before reaching resistance at ‘A,’ XLU could quickly reverse.
And that means another quick fall from ‘A’ to ‘B’ could instead be on the cards.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
Do you think XLU’s uptrend will remain intact?
P.S. We’re excited to hear what you think of your new eletter, Trading With Larry Benedict. Let us know at feedback@opportunistictrader.com.