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TECHNICAL ANALYSIS


Utility Sector Underperforming

08/27/10 09:38:47 AM
by Chaitali Mohile

The Utility Select Sector is trapped in a narrow range and is showing no strength.

Security:   XLU
Position:   N/A

On December 22, 2009, I wrote an article about the weakness in the Utility Select Sector (XLU). IXLU had witnessed a few bullish trading sessions, indicating an upward breakout of the long consolidation range. The breakout rally was diluted due to a weak uptrend. The average directional index (ADX) (14) did not surge above 25 levels indicating the lack of bullish force in the trend. As you can see from Figure 1, XLU was moving sideways.

In Figure 1, XLU retraced to the lower support at $27 from $31.10 in December 2009. The green and red support/resistance line shows strong support at $27, which was formed by the previous highs of 2008-09. Since January 2010, this support level was frequently challenged by the snaky price movement of XLU. The 200-day moving average (MA) would remain a long-term resistance for the sector index. In fact, the index was unable to breach the upper consolidation range at $31 for the much longer period. XLU is trapped in a very narrow range of $31 and $27 and is likely to remain that way for a while.

FIGURE 1: XLU, WEEKLY
Graphic provided by: StockCharts.com.
 
The full stochastic (14,3,3) that has surged into an overbought area by forming lower highs and higher lows looks like it is ready to take a deep dip. During the critical consolidation period, the average directional index (ADX) (14) developed a fresh downtrend. Although the buying pressure reflected by the positive directional index (+DI) in Figure 1 is increasing, the fresh buying force is not strong enough to develop a new uptrend. Currently, the +DI and negative directional index (-DI) have converged, indicating the likelihood of the consolidation continuing.

Thus, the utility sector looks like it would be an underperformer for the near future.



Chaitali Mohile

Active trader in the Indian stock markets since 2003 and a full-time writer. Trading is largely based upon technical analysis.

Company: Independent
Address: C1/3 Parth Indraprasth Towers. Vastrapur
Ahmedabad, Guj 380015
E-mail address: chaitalimohile@yahoo.co.in

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