Why the Healthcare Sector Could Be Set for Another Leg Down

By the time the Health Care Select Sector SPDR Fund (XLV) topped out at its all-time high in April 2022, it had risen fivefold since the start of its massive run in 2010.

However, after hitting that high, XLV’s decade-plus rally ran out of steam as it was constrained by a range-bound market.

Soon after, XLV traded in a tight $20 range between $120-140. But even in a tight range like this, a stock can still provide plenty of trading opportunities.

When we last looked at XLV on December 6 (red arrow on the chart below), it was coming off a strong rally from the bottom of that trading range in October.

However, as I warned at the time, that strong rally had put XLV into overbought territory. And that meant it was in danger of a reversal.

Today, we’ll see how that move panned out, plus what we can expect from here…

A Tight Trading Range

On the chart below, you can see the 50-day moving average (MA – blue line) has been trading in a sideways range.

It’s currently tracking just a couple of dollars above where it was at the start of the year.

Health Care Select Sector SPDR Fund (XLV)

Source: eSignal

Notably, the shorter-term 10-day MA (red line) has crossed the 50-day MA multiple times within this sideways pattern. And it now looks to be on the verge of crossing over again.

Today, we’ll concentrate on the recent downward move that began in December.

As you can see, that fall began when the Relative Strength Index (RSI) and XLV’s stock price started heading in different directions.

While XLV was making higher highs (upper orange line), the RSI was making lower highs (lower orange line). This type of declining momentum in the RSI eventually drags the stock price lower too.

And that’s exactly what happened…

After retracing from its December high, XLV then spent the rest of that month fighting to hold short-term support (horizontal red bar).

However, it was the following RSI’s action that caught my eye. Take another look at the chart…

Health Care Select Sector SPDR Fund (XLV)

Source: eSignal

After breaking down through support, the RSI tried multiple times to break up through what is now resistance. But ultimately, it failed.

And that’s why XLV recently broke through support. Adding to the bearish signals… the 10-day MA now looks likely to break below the 50-day MA.

So what am I looking for around here?

Another Leg Down

What happens with the RSI from here will be key…

For XLV to have any chance of rallying, first the RSI will need to break up through resistance.

However, after failing to do this multiple times in December – and with the RSI recently breaking lower – that move looks unlikely for now.

Instead, the RSI is showing us that XLV is setting up for another leg down… and a possible short trade.

The longer the RSI remains stuck in the lower half of its range, then the bigger any potential downward move could be.

I’ll also be watching our two MAs…

If the 10-day MA breaks decisively below the 50-day MA and begins to accelerate lower, then that will add further confirmation that XLV’s current down move has further to go.

And this could mean another potential trade is in the cards for this range-bound stock.

Reader Mailbag

In today’s mailbag, we’d like to welcome a new member to The S&P Trader…

Larry, I just wanted to send a quick message to thank you for my new subscription to your fabulous The S&P Trader! I’ve been trading option spreads for about eight years. But your service has allowed me to pay for my service after only three days of trading.

Keep up the great work and thanks again. I’m looking forward to a long relationship with you and your staff. Happy New Year.

– Larry C.

Thanks for writing in, Larry. And if anyone else wants to learn more about how to trade options spreads with us, you can find more details here.

We look forward to reading your questions and comments every day at [email protected].