Trade of the Day: Buy or Bail on Utilities SPDR (ETF) (XLU)?

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Utilities SPDR (ETF) (XLU) — XLU is up 13.4% year to date, significantly outperforming the rest of the market. In fact, in what has been a tale of two tapes this year– with the swift correction in the early months followed by an epic squeeze higher — few pockets of the market have seen such a steady climb.

However, utilities look increasingly overdone, and chasing XLU higher in the near term is not a good idea from a risk/reward standpoint.

On the fundamental side, many investors are once again bearish on the U.S. dollar and bullish on bonds/bearish on bond yields. This sentiment is a definite contrarian indicator, with the dollar looking oversold and bonds looking overbought. A reversal in the two would likely coincide with a correction in XLU.

Looking at the weekly chart, we see the price action since 2009 has mostly taken place within an orderly uptrending channel. When XLU broke out in late 2014/early 2015, it didn’t take long for a mean-reversion move to the bottom of the channel to take place. The recent rally has taken XLU back to the top of the channel, testing the early 2015 highs, and a move higher is not likely without at least a consolidation first.

XLU Weekly Chart
Click to Enlarge

Turning to the daily chart below, we see this year’s sharp rally puts XLU well above its 50-, 100- and 200-day simple moving averages. What’s more, the latest push higher came on decreasing momentum, and since then, XLU has traced out what may end up being a head-and-shoulders pattern with the neckline near $48.50.

XLU Daily Chart
Click to Enlarge

At the very least, traders should avoid buying XLU at current prices. They could also look to short shares or buy put options on a break below $48.50 with a first downside target in the $45 area.

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As of this writing, Serge did not hold a position in any of the aforementioned securities.


Article printed from InvestorPlace Media, https://investorplace.com/2016/04/utilities-spdr-etf-xlu-trade-day-3/.

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