Back-and-forth trading with a downward bias permeated markets all of last week as profit-taking pressures proved too difficult for the bulls to overcome. Weaker-than-expected U.S. GDP led to a whole host of economic uncertainties to resurface; investors remain wary of the global economic recovery despite the commitment of policymakers and beefed-up stimulus measures across the globe. Major U.S. equity benchmarks have posted an impressive performance year-to-date, although the chart pattern for the well-known Utilities Select Sector SPDR (XLU) may be foreshadowing a near-term correction for stocks at home [see Free Report: ETF Technical Trading FAQ].
To get an idea of just how broad the recent advance on Wall Street has been it makes sense to consider the performances of each sector. The Consumer Discretionary Sector (XLY), Consumer Staples (XLP), Financials (XLF), Health Care (XLV) and Technology (XLK) ETFs are all trading at levels not too far off their 2012 highs. Digging deeper, the Energy Sector (XLE), Industrials (XLI) and Basic Materials (XLB) are all sitting at support levels above their respective 200-day moving average. After reviewing the yearly performance charts for each of the sector ETFs highlighted above, it becomes quite clear that from a technical perspective the Utilities Sector (XLU) is the standout from the pack [see Simple Safe Haven ETFdb Portfolio].
Since hitting a high at $38.54 a share on August 1, 2012, XLU has corrected lower and is currently trading right above its 200-day moving average (yellow line). More importantly, this ETF has been consolidating sideways over the past month, perhaps suggesting that buyers are stepping in at the current support level right around the $36 mark (red line). Consider XLU’s price pattern over the past two years in the chart below; notice how this ETF has a tendency to climb higher after trading right near its 200-day moving average or blue trend line. Given this historical behavior, XLU currently appears to be gearing up for a similar bull-run as long as it doesn’t break below support in the coming days [see also 3 ETF Trading Tips You Are Missing].
From a fundamental perspective, XLU’s price pattern may suggest that a “risk off” wave will soon sweep over Wall Street; this may inspire investors to jump into traditionally safer corners of the market, such as the utilities sector, in lieu of chasing after returns in other overbought sectors [see also Free Report: 7 Simple & Cheap All-ETF Model Portfolios].
Traders and investors alike looking to go long at current levels should consider setting a stop-loss right around $36 a share, seeing as this is a major support level for XLU. Notice how this ETF recently held above the $36 level on June 25, 2012; a break below this point could welcome accelerating selling pressures. In terms of upside, shorter-term traders may lock-in profits anywhere between the $37 and $38 levels. As always, investors of all experience levels are advised to use stop-loss orders and practice disciplined profit-taking techniques.
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Disclosure: No positions at time of writing.