#$xlu

Here are some of the most noteworthy trendline developments across the markets for Wednesday, March 18, 2020.

NYSE Composite $NYA Testing Post-1974 Up Trendline (log scale)

S&P 500 $SPX Testing Post-2009 Up Trendline (linear scale)

Nasdaq 100 $NDX Testing Post-2016 Up Trendline (log scale)

Indian Stocks Testing Post-2009 Up Trendline $INDY $NIFTY

Utilities SPDR $XLU Testing Post-2009 Up Trendline

Intel $INTC Testing Post-2009 Up Trendline

Johnson & Johnson $JNJ Testing Post-2009 Up Trendline

Bitcoin Breaking Post-2015 Up Trendline $BTC.X

Copper Breaking Post-2008 Up Trendline

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The stock market has had a very strong run higher since the Christmas Eve low. But one sector that has done well is of particular interest. It is the Utilities Sector. Utilities are supposed to be defensive stocks, a place to hide when markets are in turmoil. That is because their regulated rates give them a buffer against economic downturns.

If you look at the Utilities sector last fall, it was lagging the broad market by about 6 weeks, peaking in mid-December as investors had been selling other stocks for some time already. But there has been no lag on the latest move higher.

Charles Dow is known as the father of technical analysis and his Dow Theory has instilled in us all the relevance and importance of market price and volume action to the analysis of financial markets and the allocation of investment portfolios and trading accounts. But perhaps its high time Dow Theory was modernized and brought into the 21st Century of trading and investing.

As the creators Stock Trader’s Almanac and champions of market cycles, patterns and seasonality we have had to change with the times over our past 52 years on The Street. Our market probability calendar has changed dramatically over the years, most notably by the mid-month spike. We’ve built on the January Barometer, First Five Days and Santa Claus Rally indicators by combing them into the January Indicator Trifecta. Adding MACD-timing to the Best Six Months has also been a boon. There is more…

The concept of Dow Theory is still quite sound: technical confirmation across correlated industries or major segments of the market economy. We are big fans of confirmation. We are especially fond of seasonal or cyclical trading patterns that are confirmed over multiple time frames: long, short and intermediate.

With all the recent near term bearish sentiment and the chatter about the big Dow Theory sell signal since the Dow Jones Transportation Average posted a confirming new low with thought it prudent to examine this closer.

Referring the “Gross Output by Industry” data as of 2018 Q2 on the St. Louis Fed’s excellent data base you can see that the services industry is about two thirds (65%) of the U.S. economic output while “goods-producing” industries are about 25% of the economy. (Government accounts for the rest.) The “transportation and warehousing” industry account for a mere 3.4% and “manufacturing” is 13.7%.

So how can such a small portion of the current economy still be deemed a leading indicator? Utilities are a paltry 1.4% of the economy, but at least everyone and everything uses energy. Think back to early 2016 when we had our last Dow Theory sell signal. Industrials and Transports made new lows but not Utilities. Perhaps confirmation from Healthcare or Financials should be considered. In any event, it’s probably time to revisit this century-old indicator.

Utility stocks have had a tough run for a while.  The Utility Sector ETF peaked in November, ahead of the broad market and swiftly reversed.  It continued down to a bottom in February over 17% lower.  And from there it started a move higher.  That move met resistance in April and pulled back again.  A series of up and down trends then has it coming into the last day of the quarter after printing its highest level in 2018.  Will the strength continue?

The chart below shows that price action.  Notice that Thursday ended with a long upper shadow.  A possible Shooting Star reversal pattern is building and can be confirmed with a lower close today.  It also is holding at the 200 day SMA, a spot it had not seen since December.  It is generally considered bullish if the price is above the 200 day SMA, so a push higher from here and close over the 200 day SMA would be a big deal.

The Utility Sector has never been a place for traders.  Staid and regulated, it is more of a place for investors looking for a steady income stream.  Dividends galore.  Quiet moves.  Sometimes it is the quiet ones that are the ones to watch though.  As my kids point out, those power line supports look a lot like Transformers ready for battle.  And now it seems they may be ready to move.  

The chart below helps tell the story.  Utilities, as measured by the Utility Sector ETF ($XLU) plodded higher from the 2016 election until a top in November 2016.  They rose more than 25% over that time.  But since that time they have pulled back hard as money moved elsewhere.  Two weeks ago the ETF hit a 61.8% retracement of that run higher and Tuesday it made a nascent move up off of that support.  

The talk over the past couple of months has been, interest rates are rising and the Fed will raise rates very soon. Joe Friday feels a big test is in play, before one can say the "rate trend has changed!"

Below looks at the yield on the 10-year note, over the past 20-years.

CLICK HERE TO ENLARGE CHART ABOVE

The yield on the 10-year note has remained inside of falling channel (1), creating lower highs and lower lows, for the majority of the past 20-years. The top of the channel is being tested as resistance at (2), as momentum is reaching lofty levels.

Joe Friday Just The Facts; The trend in rates remains down, with a key resistance test in play at (2). If rates breakout at (2), they would accomplish something they have not been able to do since the mid 1990's! Just the facts, what takes place here, could well be at least a short-term game changer!

Rate sensitive assets have experienced rare moves since July. Government bonds (TLT), Utilities (XLU) and Real Estate (IYR) have fallen hard, as interest rates have risen of sharply. Have rates hit a peak or are they just getting started, on a much greater move much much higher?

The 4-pack below looks at these "rate sensitive" assets and how they seem to be at important price points, from a Power of the Pattern perspective.

CLICK ON CHART TO ENLARGE

TLT, IYR and XLU have all declined the past few months and each are now testing multi-year rising support at each (1). Each remains inside of 5-year rising channels, despite the large declines.

One beneficiary of rising rates has been the financial sector, which has experienced a historical rally this month.

Full Disclosure- Premium Members were short bonds and long financials before the big moves recently. They have been taking gains off the table of late (selling financials and bond shorts), as these key inflection points are being tested at (1) & (2).

I humbly am of this opinion; what billions of free thinking people do at (1) and (2), could tell all of us, about the long-term trend in rates. Another key "rate sensitive" pattern is below, which is the 10-year German Bund, which we share with members weekly.

CLICK ON CHART TO ENLARGE

What billions of free thinking people do with the German Bund at (1), could tell us a ton about the long-term trend in rates!

The S&P 500 is trading at the same level where it was on July 8. Such a 15-week chop zone is pretty boring, but it doesn’t stop there. The S&P hasn’t made any net progress since May 2015.

When the broad market is stale, it makes sense to look at other opportunities.

The Profit Radar Report always scans various markets and sectors for sentiment extremes or seasonal trades with the potential to provide returns independent of the broad market.

Thus far this year, we’ve found such returns in gold, silver, natural gas, small caps, VIX and the utility sector.

Utilities ETF

The October 12 Profit Radar Report pointed out that every single utility sector stock has been below its 50-day SMA for more than five days. An extremely rare oversold condition.

The October 13 Profit Radar Report observed that: “XLU (Utilities Select Sector SPDR ETF) jumped above trend line resistance on strong volume. This increases the odds that some sort of a low is in place. We are buying XLU at 47.80."

We didn’t want to chase the S&P 500 when it bounced from its 2,120 support level on October 13, but wanted some low-risk exposure to equities.

Being oversold and overhated, XLU fit the bill.

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Sometimes there is no particular up side target (as is the case with XLU), but identifying low-risk buying opportunities allows investors to either grab quick gains or hold on and ‘play with house money.’

Bank ETF

The banking sector is approaching a very strong resistance cluster.

The chart of the SPDR S&P Bank ETF (KBE) shows price near trend line resistance, 78.6% Fibonacci retracement, and where wave A equals wave C.

Additionally, there was a bearish RSI divergence at the October 27 high.

Seasonality is bearish for the first three weeks of November.

This doesn’t mean that bank stocks will crash, but it certainly indicates that buying KBE right around 35 is a risky idea.

There is no short bank ETF, but traders may consider shorting KBE or buying inverse ETFs like SEF or SKF. This setup may only lead to a short-term correction.

Simon Maierhofer is the founder of iSPYETF and the publisher of the Profit Radar Report. Barron's rated iSPYETF as a "trader with a good track record" (click here for Barron's profile of the Profit Radar Report). The Profit Radar Report presents complex market analysis (S&P 500, Dow Jones, gold, silver, euro and bonds) in an easy format. Technical analysis, sentiment indicators, seasonal patterns and common sense are all wrapped up into two or more easy-to-read weekly updates. All Profit Radar Report recommendations resulted in a 59.51% net gain in 2013, 17.59% in 2014, and 24.52% in 2015.