utilities – Andrew Thrasher

We had last looked at a chart of utilities via the Utilities Select Sector ETF (XLU) on July 17th when momentum was diverging from price as was the trend as measured by the ADX line. Price didn’t react immediately to these divergences but eventually momentum won out knocking XLU down to where it sits today, $36.28.

Well we again are seeing a very slight divergence in momentum as we see in the top panel of the chart. I also noticed a larger divergence in the Money Flow Index, which is a volume-based momentum indicator. It is encouraging to see MFI bounce back from being oversold (below 20) and continue to advance up to 39 against the price action during the same time period. This may sound familiar, because we had the same discussion with RSI and On Balance Volume yesterday with EEM.

Next we see price is finding support near the 50% retracement level created between the April ’12 low and July ’12 high. We can also see slight resistance at the 38.2% retracement level that price knocked into last week.

Just like when observing the negative divergences back in July, we can’t assume price will immediate flip and start heading in the same direction as price and volume momentum. But it is these clues that we can begin to look for possible signs of a reversal.

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The utility sector has been treated as an equity haven by many traders during these turbulent few months, which has sending the Utilities Select Sector SPDR ETF (XLU) up nearly 9% in the last six months. Unfortunately, as XLU creeps up, momentum has not followed, making lower highs and giving signs of exhaustion for utilities.

One way we are able to measure the strength of a trend is with the Average Directional Index (ADX) indicator (the sold black line in the bottom panel of the chart). ADX is meant to be used to determine the amount of strength (or weakness) a given trend has, with no regard for the actual direction of the move. As price makes new highs, we see the strength of the trend beginning to breakdown, with ADX falling since mid-June.

XLU is also approaching its 2007 high of $37.86, which could act as a possible level of resistance we need to key an eye on.