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Utilities Tumble as Defensive Sector Turns Defensive

David Becker
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There has been a defensive shift by market participants into utilities, but this has not helped the sector stay afloat. The Utilities SPDR (XLU) has come under considerable selling pressure the last five weeks. The sector is normally a defensive sector that holds up well when the broader market is weak. The S&P 500 SPDR is down 1.9% and XLU is down a whopping 8.07% over the past month. XLU is down more than four times the amount of SPY and by far the weakest sector over this period.

There has clearly been a shift in sentiment towards this sector because utilities came under more selling pressure than the overall market. Elsewhere, note that the Industrials and the Energy are also showing relative weakness during the past month.

In the past week, the XLU has dropped 5%, and is poised to test support near the 200-day moving average at $40. Momentum is negative with the MACD (moving average convergence divergence) index generating a sell signal. This occurs when the spread (the 12-day moving average minus the 26-day moving average) crossing below the 9-day moving average of the spread.

Internet ETF advanced to the 62% retracement and consolidating with a triangle. This is a make-or-break level for the ETF. A triangle after an advance is typically a bullish continuation pattern. As such, a break above the upper trend line would signal a continuation of the May-June advance and target a challenge to the March highs. Until there is an upside breakout, there is a danger that the ETF ultimately fails at the 62% retracement and breaks support at 58. Such a move would reverse the three-month uptrend and signal a continuation of the March-May decline. This, in turn, would target a test of the May low and possibly even a break.

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