A Double Top For XLU?

03/07/06 08:32:51 AM

by Arthur Hill

The utility SPDR failed at resistance, and a break below the February low would confirm a double top.

Security: XLU
Position: Hold

After a sharp decline in October, the utility SPDR (XLU) clawed its way back with a zigzag advance over the last four to five months. The advance was in good shape as long as the higher highs persisted, but the late February high failed to exceed the late January high, and a double top is in the making.

FIGURE 1: XLU. The utility SPDR inched its way back up over the past few months, but the late February high marked a bearish engulfing pattern (gray oval).

Graphic provided by: MetaStock.

Graphic provided by: MS QuoteCenter.

A bearish engulfing marked the late February high (gray oval, Figure 1). This is a bearish candlestick reversal pattern in which the second candlestick (black) totally engulfs the first (white). It shows a complete turnaround as the stock opened strong on February 28 and closed weak. The pattern was confirmed with further weakness over the past four days.

The double top is a medium-term bearish reversal pattern that requires confirmation with a move below the intermittent low. The stock failed twice around 33, and the February low at 31.3 marks key support. A move below this level would confirm the double top and project further weakness to around 29.5 (31.15 - 31.3 = 1.85, 31.3 - 1.85 = 29.45). Even though a move to 29.45 may not seem like much, it would be enough to reverse the current uptrend and start a new downtrend. The downside target at 29.5 is only the first target.

In addition to the February low, the 200-day simple moving average (SMA) marks support just above 31.5. This moving average acted as support in late December and February. Needless to say, a move below this key moving average would further reinforce a trend change.

Arthur Hill

Arthur Hill is currently editor of TDTrader.com, a website specializing in trading strategies, sector/industry specific breadth stats and overall technical analysis. He passed the Society of Technical Analysts (STA London) diploma exam with distinction is a Certified Financial Technician (CFTe). Prior to TD Trader, he was the Chief Technical Analyst for Stockcharts.com and the main contributor to the ChartSchool.

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DOUBLE TOPS

A Double Top For XLU?

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