XLU Weekly: Pullback Low Developed, 56.98s, Retracement Rally Toward Key Supply – Utilities Select Sector SPDR ETF (NYSEARCA:XLU)

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

As noted in last week’s XLU Weekly, the highest probability path for this week was for price discovery lower within the context of a corrective phase. This week’s primary expectation did play out, albeit marginally, as a pullback low formed in Tuesday’s auction, 56.98s, before a relief rally ensued to 58.68s, challenging key supply ahead of the week’s end, closing at 58.10s.

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21-26 April 2019:

This week saw a minor price discovery lower early week as last Thursday’s late buyers failed to hold the auction. Constricted, sell-side trade developed into Tuesday’s auction, achieving the weekly stopping point low, 56.98s. Buy excess developed there, halting the sell-side sequence. Price discovery higher developed in Tuesday’s trade as buying interest emerged, 57.40s-57.44s, into Tuesday’s close.

Price discovery higher continued through Wednesday and Thursday’s trade as pullback to Tuesday’s key demand resulted in buying interest, driving price higher to 58.24s. Buyers trapped there, developing balance, 58.24s-58.01s, into Thursday’s close where buying interest emerged again, 58.02s-58.14s. A gap higher open developed in Friday’s auction as Thursday’s late buyers held the auction. Price discovery higher developed, achieving the weekly stopping point high, 58.68s, within prior key supply. Selling interest emerged there amidst sell excess halting the buy-side sequence, driving price lower ahead of Friday’s close, settling at 58.10s.

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This week’s auction saw the primary expectation play out, only marginally, as minor price discovery lower developed within the context of a pullback low formation. Price discovery higher then ensued to test key supply. Within the larger context, this development likely remains part of a potential uncompleted corrective phase.

Looking ahead, the focus into next week will center upon market response to this week’s key supply, 58.68s-58.40s. Buy-side failure at this key support area would target key demand clusters below, 57.30s-57s/56.80s-56.40s, respectively. Alternatively, sell-side failure at this support area would target key overhead supply, 58.80s-59.10s. From a structural perspective, the highest probability path remains sell-side within the context of a potential 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.

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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?

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.