Utilities ETF's Price Drop Creates Opportunity for a Generous Dividend Yield

The utilities ETF is down nearly 25% over the past five days. This creates a bargain opportunity to buy XLU for its dividend yield of 4.3%.

The Dow Jones Utility Average Index  has been hit hard over the past two weeks, and investors should take advantage by buying the Utilities Select Sector SPDR Fund  (XLU) - Get Report

At its high of $71.19 on Feb. 18, its dividend yield was 2.86%. 

Back then the ETF was in an inflating parabolic bubble formation on its weekly chart, and my recommendation was to book profits. It was not worth the risk when the dividend fell below 3%.

Over the past five trading days, however, XLU fell nearly 25%. This creates a major buying opportunity.

The utilities ETF has a dividend yield of 4.3%, according to Dividend Channel.

XLU closed Monday at $44.93, down 31% year to date. It's in bear-market territory 37% below its all-time intraday high of $71.10, set Feb. 18. Monday’s low was $43.44.

The Daily Chart for XLU

Daily chart For XLU

Daily chart For XLU

Courtesy of Refinitiv XENITH

The daily chart for XLU shows that the ETF had been tracking its 50-day simple moving average higher over the past 52 weeks. 

The ETF had been above a golden cross since Aug. 17, 2018. 

With the 50-day SMA above its 200-day SMA, the ETF powered to its all-time intraday high of $71.10, set on Feb. 18.

The ETF was above its semiannual pivot at $67.70 from Jan. 23 through Feb. 26. It gapped below this key level on Feb. 27 and held its annual pivot at $63.31 on March 2. 

The $67.70 level then became a risky level at which to sell the ETF when it was tested on March 4. At that point the dividend yield was below 3%.

The golden cross broke on March 11 when XLU gapped below the 200-day simple moving average. Then came the huge decline that can be called a crash.

The Weekly Chart for XLU

Weekly Chart For XLU

Weekly Chart For XLU

Courtesy of Refinitiv XENITH

The weekly chart for XLU is negative, with the ETF below its five-week modified moving average at $58.68. 

It sank below its 200-week simple moving average, or reversion to the mean, at $54.61 last week.

The 12x3x3 weekly slow stochastic is projected to decline to 37.42 this week from 49.9 on March 20.

During the week of Feb. 21, when XLU peaked, this reading was 91.22. When a ticker has a reading above 90, it’s in an “inflating parabolic bubble” formation. That's a signal to sell the ETF.

Trading Strategy: I do not have a value level at which to buy this ETF. I am recommending a long position based on its dividend yield of 4.3%. The upside is a return to the 200-week simple moving average at $54.62.

How to use my value levels and risky levels:

The closes on Dec. 31, 2019, were inputs to my proprietary analytics. Quarterly, semiannual and annual levels remain on the charts. Each uses the last nine closes in these time horizons.

Monthly levels for March were established based upon the February 28 closes.

New weekly levels are calculated after the end of each week.

New quarterly levels occur at the end of each quarter. Semiannual levels are updated at mid-year. Annual levels are in play all year long.

My theory is that nine years of volatility between closes are enough to assume that all possible bullish or bearish events for the stock are factored in.

To capture share-price volatility investors should buy on weakness to a value level and reduce holdings on strength to a risky level. A pivot is a value level or risky level that was violated within its time horizon. Pivots act as magnets that have a high probability of being tested again before its time horizon expires.

How to use 12x3x3 Weekly Slow Stochastic Readings:

My choice of using 12x3x3 weekly slow stochastic readings was based upon back-testing many methods of reading share-price momentum with the objective of finding the combination that resulted in the fewest false signals. I did this following the stock market crash of 1987, so I have been happy with the results for more than 30 years.

The stochastic reading covers the past 12 weeks of highs, lows and closes for the stock. There is a raw calculation of the differences between the highest high and lowest low versus the closes. These levels are modified to a fast reading and a slow reading and I found that the slow reading worked the best.

The stochastic reading scales between 00.00 and 100.00 with readings above 80.00 considered overbought and readings below 20.00 considered oversold.

A reading above 90.00 is considered an “inflating parabolic bubble” formation that is typically followed by a decline of 10% to 20% over the next three to five months.

A reading below 10.00 is considered as being “too cheap to ignore” which typically is followed by gains of 10% to 20% over the next three to five months.

Disclosure: The author has no positions in any stocks mentioned and no plans to initiate any positions within the next 72 hours.