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
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