Utilities ETF Headed into Major Resistance

12/31/2009 12:01 am EST

Focus: ETFS

An upper range of a triangular formation in 2008 restricted the bullish rally of the Utilities Select Sector SPDR (XLU) in 2009. The bearish breakout of the triangular pattern plunged XLU to the lowest level at 22. The pullback rally from the new low erupted due to an overheated downtrend reflected by the average directional movement index (ADX) (14) and the highly oversold relative strength index (RSI) (14).

Both indicators suggested a trend reversal rally. In addition, the moving average convergence/divergence (MACD) (12,26,9) showed strong positive divergence by forming higher bottoms. Therefore, the rally began on the robust bullish notes, hitting a first trading resistance near 28 levels.

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The weak indicators and an immediate resistance of the 200-day MA have suppressed the breakout rally.

Since July 2009, XLU has been struggling in a narrow range between 28 and 30. Generally, we believe that the consolidation after a rally induces the required strength for the future rally. But if the consolidation continues for more than four to six weeks, the stock turns weaker, thus affecting the breakout. In the chart above, XLU has been consolidating for more than three months; therefore, the breakout was likely to be weaker. But as we can see on the weekly chart, the breakout was accompanied by strong volume for almost two weeks. The two white candles show bullishness in the rally.

Meanwhile, the RSI (14) that was shaky near the center line (50 level) has surged to 60, indicating marginal bullish strength in the breakout. The MACD (12,26,9), however, is positive that the indicator is not completely bullish to generate a fresh momentum for XLU. Currently, the ADX (14) is indicating a developing uptrend.

Therefore, all three indicators are lacking the robust bullish force to pull XLU toward its long-term moving average (MA) resistance, the 200-day MA. The stock is likely to get highly volatile due to the weak indicators and the moving average resistance. The daredevils can grab a trade between the support and resistance of 30 and 32 levels, respectively. XLU would remain under pressure until the strong uptrend is developed and the fresh bullish strength got generated.

By Chaitali Mohile

Chaitali Mohile is an active independent trader and an expert in technical analysis.

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