Wednesday, August 6, 2014

Signs Of A Washout In Utilities

The utilities ETF, $XLU, is now off more than 10% from it’s high.  Among the nine SPX sectors, its performance in the past 2 months has been the worst.

The main part of the (initial) fall is likely to be over.

Zero companies in the XLU are now above their respective 50-dma. In the past 4 years, this level of ‘breadth’ has been very close to a low in the sector’s price (red circles). It's not always the exact low, but close. A scenario like that in 2010 - a bounce followed by a lower low - is possible over the medium term

XLU has followed a distinct pattern: break out and  then a subsequent retest of the break out months later. Note the blue break out lines and the subsequent circles in the weekly price chart below. These were important pivot points for XLU that were subsequently revisited. That level now is about $0.5 lower.

XLU is also approaching its 200-dma, a moving average that it has not touched in 7 months. Not always, but usually the first touch in a long time is a bounce opportunity. On it’s own, support at the 200-dma would be a much riskier bet, but the breadth and weekly charts above lend greater likelihood for support holding within the next 1-2%.

Ideally, we would see a positive divergence in RSI, a candle with a long lower shadow and/or stabilization in price (a base of up and down days near support) to mark a low risk entry point.