Momentum Turns Up as Utes Form Bullish Pattern


The Utilities SPDR is lagging the broader market over the last eight weeks, but a close look at price action reveals an uptrend, a bullish continuation pattern and an uptick in short-term momentum. Let's investigate.

First and foremost, the long-term trend is up for the Utilities SPDR (XLU). The ETF hit a new high in April and is trading well above its rising 200-day SMA. The 50-day SMA is also above the 200-day. A long-term uptrend means we want to look for bullish setups and bullish continuation patters. In other words, trade in the direction of the bigger trend.

A bullish continuation pattern is basically a correction within a bigger uptrend. Corrections can take the shape of flat trading ranges (rectangles), declines (falling wedges/channels), contracting consolidations (triangles) or some sort of hybrid. Corrections digest the prior gains and pave the way for the next move.

The chart shows XLU with a 16.7% advance and a triangle of sorts taking shape. XLU was quite overbought after this big advance and the triangle consolidation alleviated these overbought conditions. A triangle breakout would signal an end to the correction and a resumption of the bigger uptrend.

Signs of a breakout are already present. First, XLU broke above last week's high with a two day surge last week (Wed-Thu). Second, the Percentage Price Oscillator (PPO) turned up with a move above its signal line and into positive territory. This shows an upturn in momentum. I would expect XLU to complete its triangle breakout as long as the PPO holds above its signal line.

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Arthur Hill, CMT

Chief Technical Strategist,

Author, Define the Trend and Trade the Trend

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Arthur Hill
About the author: , CMT, is the Chief Technical Strategist at Focusing predominantly on US equities and ETFs, his systematic approach of identifying trend, finding signals within the trend, and setting key price levels has made him an esteemed market technician. Arthur has written articles for numerous financial publications including Barrons and Stocks & Commodities Magazine. In addition to his Chartered Market Technician (CMT) designation, he holds an MBA from the Cass Business School at City University in London. Learn More
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