A Dozen Reasons to Keep XLU On Your Radar

Along with a spiking volatility index and another high-profile staff departure at the White House, investors last week were focused on the Fed. The July meeting minutes released last Wednesday seemed to suggest a general readiness to begin unwinding the central bank's substantial bond holdings in the near future, but policymakers are also now considering the prospect that the Trump administration may be less effective than anticipated at implementing the business-friendly reforms -- consensus expectations for which played no small part in the post-election rally in stocks. And as of the close of last week's trading, CME Group's FedWatch Tool reflected only a 40% chance of another rate hike by year-end.

Steadily cooling rate-hike expectations no doubt contributed to ramped-up call option volume late last week on the Utilities Select Sector SPDR Fund (XLU), with roughly 86,000 calls crossing the tape during the course of Thursday's sell-off -- a figure that exceeds the exchange-traded fund's (ETF) average daily call activity by a margin of 9-to-1.

As of Friday morning, XLU call open interest had escalated to a new multi-year peak of 397,382 contracts, representing the most substantial accumulation of calls on the utilities fund that we've seen in this current rate-tightening cycle. The biggest overnight addition of 79,213 contracts was located at the September 57 call. Data from the major options exchange points to buy-to-open activity at this strike, which is located a couple of points and some change north of the ETF's prevailing all-time high.

So the number of open XLU calls is standing north of 390,000 for the first time since September 2013, while traders are increasingly discounting the likelihood of another Fed rate hike in 2017 -- a policy environment that would traditionally be considered favorable for utilities stocks. Meanwhile, on the charts, XLU set a record intraday high of $54.76 on Friday afternoon, briefly pushing past the twin peaks at $54.63 set on June 2 and Aug. 17 -- but ultimately closing the week at $54.50, as it was unable to notch a new closing high.

With utilities drawing intense scrutiny -- and options players anticipating a continued rise to new record highs -- contrarians should keep a close eye on XLU's progress around the following key price levels. Within the span of 10 points on the charts, we can easily pinpoint an even dozen that could emerge as either support or resistance in the days and weeks ahead, which should provide valuable clues as to whether this suddenly hot sector is technically strong enough to endure the pervasive geopolitical uncertainty that has become the distinguishing characteristic of this year in the markets so far:

• $55.20 - +20% from November 2016 post-election low close
• $54.76 - Aug. 18 all-time intraday high
• $54.63 - June 2/Aug. 17 intraday highs
• $54.57 - Aug. 16 all-time closing high
• $53.42 - +10% year-to-date
• $53.02 - July 2016 high
• $50 - top open interest strike (104,553 contracts at the September 50 put)
• $49.11 - 90% of all-time closing high
• $49.17 - Nov. 8, 2016 pre-election close
• $48.57 - 2016 year-end close
• $46.00 - Nov. 14, 2016 close
• $45.48 - double March 9, 2009 all-time closing low

Subscribers to Bernie Schaeffer's Chart of the Week received this commentary on Sunday, August 20.