XLU Weekly: Balance Development Following Last Week’s Pullback From All-Time High – Utilities Select Sector SPDR ETF (NYSEARCA:XLU)

In this article, we examine the significant weekly order flow and market structure developments driving [[XLU]] price action.

As noted in last week’s XLU Weekly, the highest probability path for this week was for price discovery higher, following the recent buy-side breakout. This week’s primary expectation did not play out as balance development unfolded, 57.44s-58.34s, above key demand. Rotation higher toward balance high developed into week’s end, closing at 58.21s.

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07-12 April 2019:

This week saw rotation lower early in Monday’s auction as last Friday’s late buyers failed to hold the auction. Price discovery lower developed to 57.54s near key demand. Sellers trapped there as constricted trade developed, 57.54s-57.75s, into Monday’s close. Narrow trade continued through Tuesday’s auction within Monday’s balance before buying interest emerged, 57.75s, into Tuesday’s close.

A buy-side breakout attempt developed early in Wednesday’s trade as Tuesday’s late buyers held the auction. Minor price discovery higher developed, achieving the weekly stopping point high, 58.34s, where sell excess developed. Rotation lower then developed back through the week’s range, testing Monday’s low into Wednesday’s close. Buying interest emerged late in Wednesday’s trade near key support. Wednesday’s late buyers held the auction, resulting in rotational trade higher in Thursday’s trade to 57.96s. A probe of key support early in Friday’s auction saw development of a buy excess, driving price higher to 58.27s, near the weekly high ahead of Friday’s close, settling at 58.21s.

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This week’s auction did not see the primary expectation play out as balance development unfolded above last week’s key demand. Within the larger context, this development is likely the beginning of a relief rally within a potential uncompleted corrective phase.

Looking ahead, the focus into next week will center upon market response to key supply overhead, 58s-58.34s. Sell-side failure at this key supply area would target key overhead supply, 58.40s-58.70s/58.80s-59.10s, respectively. Alternatively, buy-side failure at this key supply area would target key demand clusters below, 57.40s-57.10s/56.80s-56.40s, respectively. From a structural perspective, the highest probability path shifts buy-side within the context of a likely relief rally within a three-wave corrective phase. Within this near-term context, the intermediate term (3-6 month) has shifted buy-side with acceptance above 57.32s. Market behavior in this area in coming days and weeks remains structurally significant.

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It is worth noting that sentiment based on the S&P Utility Sector Bullish Percent Index now reflects a bounce from the levels of neutral sentiment developed into early January. Stocks more broadly, as viewed via the NYSE, have also seen rising bullish sentiment from the December 2018 low. Asymmetric opportunity develops when the market exhibits extreme bullish or bearish sentiment with structural confirmation. Within the context of December 2018’s correction, the market developed a stopping point low within prior key demand. Subsequently, price discovery higher back to major resistance and new all-time highs have developed. The market has auctioned from levels of neutral sentiment to extreme optimism as price has made new all-time highs and now pulled back. Sentiment in the broad market has paused as utilities now see extreme optimism. While data within the associated derivative (XLU sector futures contract) does not confirm extreme herding, the development of extreme optimism warrants caution regarding further buy-side potential for utility shares raising the question, from where will the “greater fools” come next to drive prices higher still?

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The market structure, order flow, and sentiment posture will provide the empirical evidence needed to observe where asymmetric opportunity resides.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.