By Larry Benedict, editor, Trading With Larry Benedict
During a massive 12-year rally, the Health Care Select Sector SPDR Fund (XLV) gained just over 400%.
But XLV’s rally topped out in April last year as buying momentum dwindled.
Since then, XLV has traded in a sideways range.
When we checked in on XLV at the start of this month, it had fallen steadily within that range since December 2022.
Then, it found a base in March and rose higher.
But that move now looks like it may have fizzled out. So today I want to see where XLV is heading next…
Unable to Break Resistance
You can see XLV’s rangebound pattern in the chart below…
The longer-term 50-day moving average (MA, blue line) has meandered sideways.
And the shorter-term 10-day MA (red line) crossed it numerous times in both directions – a common sideways pattern…
Health Care Select Sector SPDR Fund (XLV)
Source: e-Signal
XLV’s most recent peak in December at ‘A’ coincided with another common reversal pattern…
As XLV was making higher highs (upper orange line), the Relative Strength Index (RSI) was making lower highs (lower orange line).This steady decline in buying momentum drives a stock lower.
XLV’s downtrend gained traction along with two other bearish signals…
- The RSI fell through support (green line) and remained stuck in the lower half of its range.
- The 10-day MA crossed below the 50-day MA with both tracking lower.
When we checked in on XLV on April 4 (red arrow), we discussed how the RSI had peppered resistance throughout that down move from December through February… but it was unable to break through.
That’s why XLV kept falling.
Then, after its initial bounce in early March, XLV bottomed out with the RSI forming a ‘V’ in oversold territory (lower grey dashed line).
XLV rallied as momentum in the RSIkept rising (red line)…
But we noted that the RSI had only just broken up through resistance. For XLV’s rally to continue, the RSI needed to gain traction in its upper band.
Next, the 10-day MA needed to cross above the 50-day MA to add further confirmation of that up move.
And as you can see, that’s exactly how things played out.
Take another look at the chart…
Health Care Select Sector SPDR Fund (XLV)
Source: e-Signal
But about a week ago, the RSI formed an inverse ‘V’ in overbought territory (upper grey dashed line). And XLV has also topped out and reversed.
So what can we expect from here?
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Developing Down Move
The key thing I’m watching right now is the RSI…
As the chart shows, the RSI is tracking lower and could soon test support (red circle).
If the RSI can hold that support level and regain momentum in its upper range, then XLV could also form a short-term base and rally higher.
However, if the RSI instead breaks through support and keeps falling, then there is more to come with this down move…
The RSI tracking for a prolonged period in its lower half (as we saw in December through March) could see XLV’s initial down move then develop into something much bigger.
And that could provide the setup for a potential short trade.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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Reader Mailbag
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