Flipping the Script: Defense as a New Offensive Playbook | chart watcher

Historical and seasonal performance data suggests that the utilities and consumer staples sectors could be effective growth vehicles, especially in March. Technical analysis of the current price action for the Utilities Select Sector SPDR Fund (XLU) and Consumer Staples Select Sector SPDR Fund (XLP) supports the thesis that these sectors are poised for growth, giving traders the potential to take advantage of this seasonal trend. provides a favorable entry point.

If the best defense is a strong attack, sometimes the most effective attack is a defensive tactic used offensively (as Napoleon did when he used split square tactics at the Battle of the Pyramids). It’s a matter of proper placement and timing.

The same goes for changing growth and defense strategies in a trade. In particular, this article focuses on leveraging the utilities and consumer staples sectors as a vehicle for growth. It’s a question of timing.

Are you using your defensive sector to capitalize on seasonal growth opportunities?

This article takes the queue and a bit of a diversion from Tom Bowley’s insightful article. Here he discusses the risk-on and risk-off environment, comparing XLU and XLP to a technology sector proxy, the “very aggressive” Technology Select Sector SPDR Fund (XLK). Bowley makes a compelling and balanced case for considering risk and caution as the current bull market continues to reach new heights.

This piece needs a bit of a transition. The argument goes like this: From a seasonality perspective, March is: Best month for XLU growth, second best month for XLP growth. Simply put, these two defensive plays bring out the most offensive qualities (on a season basis) in March.

10-Year Seasonal Performance of XLU vs. S&P 500

Chart 1. 10-year seasonality chart of XLU VS S&P 500. Relative to the broader market, March was XLU’s strongest month.Chart source: StockCharts.com. For educational purposes.

On average over 10 years, the Utilities sector (XLU) has outperformed the S&P 500, with a March close of 89% and an average return of 2.9%. If you look at all 12 months, you won’t find a better performing month than March.

10-Year Seasonal Performance of XLP vs. S&P 500

Chart 2. 10-year seasonality chart of XLP and S&P 500. March was XLP’s second-best performance versus the S&P, following December.Chart source: StockCharts.com. For educational purposes.

On average, XLP has outperformed the S&P 500 over a 10-year period with a 56% higher closing rate and an average March return of 1.3%. The highest average close and return rates are in December, but March is the second best performing month for XLP.

Using “safe” plays as “bold” moves

Similar to the analogy mentioned above (using defensive tactics to achieve offensive results), might it be wise to shift your trading focus to a “cautionary play” to get ahead of the broader market? Historically and seasonally, this has played out well on average over the past decade, but whether the odds are in your favor this year really depends on the vagaries of market sentiment and whether you can find a reasonable entry point at current prices. environment.

There are finally just a few days left in March.

XLU’s Price Action Now

Chart 3. Daily chart of XLU. A swing chart makes direction and entry/exit points clear.Chart source: StockCharts.com. For educational purposes.

As seen in the Money Flow Index (MFI), the last two lower lows in January and February coincided with increased buying pressure., which can also be thought of as a volume weighted RSI. The strength gap between falling prices and increasing buying pressure foreshadowed higher prices this month.

Looking at the zigzag You can tell by looking at the line swing point It’s what defines trends. Therefore, if XLU turns around and rises to meet seasonal forecasts, it would need to break above the two swing highs of $62.25 and $62.62 (see green dotted lines) to break the current downtrend. It also needs to stay above $59.15, the most recent low (see red dotted line).

If you want to buy XLU, a break above $62.25 with high momentum could be a favorable entry point.

XLP’s current price action

Chart 4. XLP daily chart. Are you just sailing without a cloud in sight? Otherwise, it’s a seemingly boring chart.Chart source: StockCharts.com. For educational purposes.

Consumer Staples (XLP) appears to be moving rather quietly. Explore the Relative Strength Index (RSI), XLP is neither overbought nor oversold. It’s right in the middle. To get clearer, volume-weighted readings, look at: Funds Flow Index (MFI); This shows almost the same thing, but with a slightly upward slope, indicating a slight increase in buying pressure.

The chart draws trend lines showing the main trends and Kumo (Ichimoku Cloud). For secondary context. Based on all these numbers, XLP gives every indication that it is on the rise. So, if you want to buy XLP to take advantage of seasonal expectations, taking a position close to the trend line (e.g. $73.50) could be an advantage. We do not want the price to fall below the trend line, and a close below the most recent low of $72.36 would likely invalidate the bullish theory.

conclusion

Strategically leveraging the Utilities (XLU) and Consumer Staples (XLP) sectors for seasonality-based opportunities is an interesting example of using a defensive tool to pursue growth. As with all trading, timing is important, and March, historically the strongest next month for the sector, provides a unique window for this strategy. Of course, seasonality is never a sure thing, so if you plan on pursuing this opportunity, be prepared to exit at the first sign that this season may not follow historical patterns.

disclaimer: This blog is for educational purposes only and should not be construed as financial advice. You should not use any of our ideas and strategies without first evaluating your personal and financial situation or consulting a financial professional.