XLU Weekly: Rally Early Week Toward Key Resistance Where A Sell Response Drove Price Lower To Test Key Support

Summary

• A rally developed early to 60.40s as last Friday’s late sellers failed to hold the auction.
• Sell excess developed there, driving price lower toward key support, 56.64s, before a breakdown attempt developed into the week’s end.
• From a structural perspective, the highest probability path near-term is sell-side, barring failure of 60.04s as support.
• Bullish breadth breaks down through mid-range.

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

As noted in last week's XLU Weekly, the highest probability path for this week was for price discovery higher, barring failure of 56.64s as support. This week's primary expectation did play out early week, as a rally developed to 60.40s within the upper end of the April balance area. Structural sell excess developed there, halting the rally before a selloff developed toward key support, 56.64s, in Thursday's auction. Buyers trapped in this area before a sell-side breakdown developed to 55.56s, ahead of Friday's close, settling at 55.88s.

27 April-01 May 2020:

This week's auction saw minor price discovery higher to 59.35s in Monday's trade as last Friday's late buyers failed to hold the auction. Narrow balance then developed before buying interest emerged, 58.93s/59.02s, into Monday's close. Monday's late buyers held the auction as a gap higher open developed in Tuesday's trade, achieving the weekly stopping point high, 60.40s. Structural sell excess formed there, halting the rally as a pullback developed to 58.88s before buying interest emerged, 58.08s, into Tuesday's close.

Tuesday's late buyers initially held the auction as a retracement higher to 60.14s developed early in Wednesday's auction. The weekly sell excess held as resistance as the market rolled over and price discovery lower resumed with selling interest, 59.13s/59.02s, emerging ahead of Wednesday's close. A gap lower open formed in Thursday's trade, achieving a stopping point, 56.73s, testing key support. Buying interest emerged there as balance developed, 56.73s-57.51s, into Thursday's close. Thursday's late buyers failed to hold the auction as a gap lower open through key support developed in Friday's trade. The selloff continued, achieving the weekly stopping point low, 55.56s, ahead of Friday's close, settling at 55.88s.

This week's auction did see the primary expectation play out early week before a structural sell excess developed. This was indication and warning of the end of the rally; the market subsequently traded lower testing and breaking through key support into week's end. Within the larger context, the current rally from 43.44s to 61.78s is likely a relief rally within a larger incomplete corrective phase.

Looking ahead, the focus into next week centers upon response to last week's breakdown area, 56.64s-55.56s. The market continues to seek support in a process known as price discovery. Buy-side failure within this key cluster would target key demand clusters below, 54s-51s/48.33s-47.27s, respectively. Alternatively, sell-side failure at this key demand cluster would target key supply clusters above, 60s-62s/64.60s-68.83s, respectively. From a structural perspective, the highest probability path near-term is sell-side, barring failure of 60.40s as resistance. Within this near-term context, the intermediate-term (3-6 month) bias is now neutral barring failure of 43.44s as support or 61.78s as resistance.

It is worth noting that bullish breadth based on the S&P Utility Sector Bullish Percent Index, like all other sectors, saw a historic collapse in breath from February into March before a historic rebound occurred. Stocks more broadly, as viewed via the NYSE, have seen recent similar behavior. Utilities' breadth is declining and broke down through the midpoint last week, implying continued risk-off sentiment in this sector will prevail near-term. Asymmetric opportunity develops when the market exhibits extreme bullish or bearish breadth with structural confirmation. Intermediate-term structure shifts neutral. While the initial correction from all-time highs was severe, it remains most likely incomplete.

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

Analyst’s 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.