Bullish Divergence in Utilities

Utilities have been taking a beating lately, being the worst performer of the S&P sectors over the last 6 months, down 1.59% while the S&P 500 is up over 7%.

These types of drops make for some interesting chart setups. Below we have a chart of the Utilities Select Sector SPDR ETF (XLU). On the top panel I’ve put the Relative Strength Indicator (RSI) which we can see had fallen to under 30, a sign that selling momentum has been extremely heavy.

On the bottom panel we can take a look at one of my favorite indicators, the Money Flow Index (MFI), which takes into account both price and volume in the form of an oscillator. Over the past 3 months we have seen three divergences take shape in the MFI. First we saw Money Flow diverge as price made lower lows, a sign that sellers could be losing their momentum to drive the ETF lower. We then saw a similar divergence in October but this time MFI was unable to hit new highs alongside price, which was followed by XLU dropping 10%.

Now we are seeing another bullish divergence take place like what we saw in September. First the MFI became ‘oversold’ as it broke below 20 and then began to rise while price continued to be depressed. One of the differences between now and September is we did not see momentum (via the Relative Strength Index) at such low levels.

I’ll be watching to see if this divergence continues to play out or if price begins to advance to potentially its 200-day moving average. Traders have not been a fan of XLU lately, time will tell if sentiment towards this ETF shifts.

Disclaimer: Do not construe anything written in this post or this blog in its entirety as a recommendation, research, or an offer to buy or sell any securities. Everything in this post is meant for educational and entertainment purposes only. I or my affiliates may hold positions in securities mentioned in the blog. Please see my Disclosure page for full disclaimer. Connect with Andrew on Google+.

About Andrew Thrasher, CMT

Andrew Thrasher, CMT is a Portfolio Manager for an asset management firm in Central Indiana. He specializes and writes about technical analysis as well as macro economic developments.
  • Kevin

    It looks like utilities are set up to make a recovery back up to their 200-day moving average (and then possibly decline again?).

    • Andrew Thrasher

      Can’t say what XLU will do if it gets to its 200 day moving average. Have to be patient and make decisions a based in price action rather than trying to make a guess. But thanks for the comment!

  • Based on my own personal charts…this thing looks like its ready for a rebound. Nice find.

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