A Shocking Turn of Events in Utilities?

I know, the title along makes you want to hit the eject button, but bear with me. The strong move on Friday that helped lift equities into the black for the week was especially powerful for the more downtrodden sectors including utilities along with fellow momentum play energy and more cyclically inclined industrials. Why the big push in the utilities?

For the more technically oriented, XLU found support close to its 200 day simple moving average, nearly glancing off on heavy volume for a bounce higher to end the week nearly unchanged. Breadth and momentum in the sector also reached new short-term lows on Wednesday with XLU having exactly ZERO holdings above their 50 day moving averages. From a momentum point of view, on Wednesday the short term momentum score for the last year was at the 0.00 percentile and longer-term scores over the last five years ranged from 1st percentile to the 4th percentile. By the end of the big rally on Friday, this number of components above their 50 day MA has risen to 3 (out of 30) while momentum scores were nearly out of the lower quartile. Given the strong move, where can we go from here?

On a short-term basis, XLU has managed to pull itself out of oversold status and could be bouncing its way higher as the selling pressure eases. After the heavy distribution over the first half of the week as anyone who still had profits decided to take them while they could, it’s not surprising that new buyers emerged hoping that momentum would be reignited. But moves off a 200 day moving average are tricky. How much of the move comes from the risk-on trade as equities in general begin to move higher?

Short-Timers: I’d keep an eye on the 50 day simple moving average at $42.56 to see if the strength is there for push higher. If we can clear that, we might break out of this descending triangle (typically a bullish pattern) and move back to $44 a share and if we fail, the triangle might turn into a downtrend channel. Still, for those with itchy trigger fingers, this could turn into something profitable IF you can time it well.


For Those Playing the Long Game:
I’m going to admit a certain weakness with candlesticks, but the following chart seems to indicate a dragon fly doji or that the selling pressure at the start of the week was nearly absolved by buying pressure at the end and could indicate that the multi-week downtrend could be ending.

The most likely direction for the coming week will be up and where we go after that is the real question. Charting is more an art than a science because I’m sure three people could see four different patterns in the following chart. I see a potential head and shoulders set-up with a head at $44 and the neckline at $41.44, leading to a potential low at $38.88.


Sector Rotators:
For those few out there playing the sector rotation game, I’d advise caution before committing everything to utilities. While they did outperform on Friday, they still have yet to show the strength necessary to break out of the xlu:spy downtrend channel. One of the complaints of technical analysis is that its focus the need for confirmation can lead you to missing out on the early stages (and high profits) of an upmove. Remember, we’re not here to offer advice but guidance. Given the weak performance over the last few months, are you willing to push more chips to the center of the table?


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