The Utilities SPDR (ETF) (NYSEARCA:XLU) — which represents the utilities sector of the S&P 500 — has been in a lull since early July. But for the year-to-date, the XLU remains higher by about 18%, largely outperforming many asset classes and the vast majority of the U.S. stock market. The XLU ETF is now coming into a better technical support area. Following this week’s Federal Open Market Committee meeting, another buying opportunity could well rear its head.
On July 11, I shared a trade idea to either short the XLU ETF or for investors long the XLU to sell part of their holdings to buy them back at lower levels. A few weeks later, my first downside target near the $50 area was reached.
Now, things call for an update.
Two important central bank meetings are scheduled for Wednesday: the Bank of Japan, followed by the Federal Reserve later that day. No one expects either bank to make drastic changes to their interest-rate policies. However, a marginally more dovish tone by the Fed than what we have heard as of late could lead to another round of buying in bonds (i.e., a drop in interest rates). That alone would likely result in a bid in utilities and the XLU.
XLU ETF Charts
On the longer-term charts, we see that the XLU ETF in late June/early July had once again overshot its multiyear uptrending channel. This has since led to a nice, healthy (so far) mean-reversion move lower.
Through a pure trend-following lens, the XLU ETF would arguably offer a better buying opportunity at the lower end of this longer-standing channel. However, given this week’s central bank meetings and an overbought technical perspective (momentum oscillators), this juncture does bear watching for a potential bullish reversal to sink our teeth into.
On the daily chart, we see that the “corrective” move over the past couple of months in the XLU ETF has largely taken place in a down-trending channel that found some technical support earlier this month just as the daily MACD momentum oscillator also became oversold.
One of my former mentors used to tell me every day that price is the only thing that pays traders and investors. As such, let me remind you that unless we see a better bullish reversal take hold for the XLU on a weekly closing basis, the utilities are still favoring further consolidation.
Specifically, the XLU ETF needs to give us a weekly close above $50, which could set up a next leg higher. I see an initial price target back at the early July highs near $53.
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