Utility ETF Gaining Momentum

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April 4th, 2022 Utility ETF Gaining Momentum Dear Reader, On Friday, we looked at a Daily Price Chart of CF Industries Holdings, Inc., noting that the stock was trading in the Keltner Channel ‘Buy Zone’. For today’s Trade of the Day e-letter we will be looking at a Moving Average Convergence/ Divergence (MACD) chart for the Utilities Select Sector SPDR Fund ETF, symbol: XLU. Before breaking down XLU’s MACD chart let’s first review the investment objective of the ETF. The XLU ETF seeks to track the performance of the index, the fund employs a replication strategy. It generally invests substantially all, but at least 95%, of its total assets in the securities comprising the index. The index includes securities of companies from the following industries: electric utilities; water utilities; multi-utilities; independent power and renewable electricity producers; and gas utilities.    MACD Indicator confirms Price Momentum The XLU daily price chart below shows that XLU is in a price uptrend as the 24/52 day MACD line (black line) is above the 18-Day EMA (purple line). The Moving Average Convergence/ Divergence chart is shown below the daily price chart. MACD uses moving averages to create a momentum indicator by subtracting the longer-term moving average from the shorter-term moving average. The MACD is calculated by subtracting an ETF’s longer term 52-Day Exponential Moving Average (EMA) from its shorter term 24-Day EMA. This creates the MACD line. MACD ‘Buy’ Signal The 18-Day EMA line functions as a buy/sell ‘trigger’. When the 24/52 Day MACD line crosses above the 18-Day EMA line it indicates positive momentum and higher prices for the ETF. When the 24/52 Day MACD lines crosses below the 18-Day EMA it indicates negative momentum and lower prices for the ETF. MACD is more of a leading indicator than a moving average cross over which tends to lag price movement. MACD Histogram shows Acceleration of Momentum Also included in a MACD chart is the histogram bar graph. This portion of the chart helps to illustrate the distance between the 24/52 Day MACD and the 18-Day EMA. When a crossover initially occurs, the histogram’s bar will be near flat as the two indicator lines have converged. As the lines begin to separate, the bars grow in height, indicating a widening gap and acceleration for the stock’s momentum. When the histogram’s bars begin to shrink this indicates a narrowing of the gap between the 24/52 Day MACD and the 18-Day EMA and a slowing of the ETF’s momentum. When the gap between the two indicators begins to narrow, this typically indicates a crossover of the indicator lines could happen soon. Buy the XLU ETF As long as the 24/52 Day MACD line remains above the 18-Day EMA, the ETF is more likely to keep trading at new highs in the coming days and weeks. Since XLU’s bullish run is likely to continue, the ETF should be purchased. Our initial price target for XLU is 79.25 per share. 98.0% Profit Potential for XLU Option Now, since XLU’s 24/52 Day MACD is trading above the 18-Day EMA this means the ETF’s bullish rally will likely continue. Let’s use the Hughes Optioneering calculator to look at the potential returns for an XLU call option purchase. The Call Option Calculator will calculate the profit/loss potential for a call option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat XLU price to a 12.5% increase. The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following XLU option example, we used the 1% Rule to select the XLU option strike price but out of fairness to our paid option service subscribers we don’t list the strike price used in the profit/loss calculation. Trade with Higher Accuracy When you use the 1% Rule to select an XLU in-the-money option strike price, the XLU ETF only has to increase 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money call option and the underlying ETF closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if XLU is flat at 75.50 at option expiration, it will only result in a 1.3% loss for the XLU option compared to a 100% loss for an at-the-money or out-of-the-money call option. Using the 1% Rule to select an option strike price can result in a higher percentage of winning trades compared to at-the-money or out-of-the-money call options. This higher accuracy can give you the discipline needed to become a successful option trader and can help avoid 100% losses when trading options. The goal of this example is to demonstrate the powerful profit potential available from trading options compared to ETFs. The prices and returns represented below were calculated based on the current ETF and option pricing for XLU on 4/1/2022 before commissions. When you purchase a call option, there is no limit on the profit potential of the call if the underlying ETF continues to move up in price. For this specific call option, the calculator analysis below reveals if XLU increases 5.0% at option expiration to 79.28 (circled), the call option would make 48.4% before commission. If XLU increases 10.0% at option expiration to 83.05 (circled), the call option would make 98.0% before commission and outperform the ETF return nearly 10 to 1. The leverage provided by call options allows you to maximize potential returns on bullish ETFs. The Hughes Optioneering Team is here to help you identify winning trades just like this one. Interested in accessing the Optioneering Calculators? Join one of Chuck's Trading Services for unlimited access! The Optioneering Team has option calculators for six different option strategies that allow you to calculate the profit potential for an option trade before you take the trade. Trade Like a Champion?  Do you want to start receiving hand-picked trades from 10-Time Trading Champion, Chuck Hughes? As a Trade of the Day subscriber, Chuck is offering you a special discount on his Weekly Option Alert Trading Service. Just call Brad at 1-866-661-5664 or 1-310-647-5664 to join and use the code "Optioneering VIP" to receive special pricing!   Wishing You the Best in Investing Success, Chuck Hughes Editor, Trade of the Day Have any questions? Email us at dailytrade@chuckstod.com   If you didn't create an account using this email address, please ignore this email or unsubscribe. To ensure delivery of this email to your inbox and to enable images to load in future mailings, please add todaystrade@chuckstod.com to your e-mail address book or safe senders list. © 2021 Tradewins Publishing. All rights reserved. The information provided by the newsletters, trading, training and educational products related to various markets (collectively referred to as the "Services") is not customized or personalized to any particular risk profile or tolerance. Nor is the information published by Legacy Publishing, LLC ("Legacy") a customized or personalized recommendation to buy, sell, hold, or invest in particular financial products. Past performance is not necessarily indicative of future results. Trading and investing involve substantial risk and is not appropriate for everyone. The actual profit results presented here may vary with the actual profit results presented in other Legacy Publishing LLC publications due to the different strategies and time frames presented in other publications. Trading on margin carries a high level of risk and may not be suitable for all investors. Other than the refund policy detailed elsewhere, Legacy does not make any guarantee or other promise as to any results that may be obtained from using the Services. Legacy disclaims any and all liability for any investment or trading loss sustained by a subscriber. You should trade or invest only 'risk capital' - money you can afford to lose. Trading stocks and stock options involves high risk and you can lose the entire principal amount invested or more. There is no guarantee that systems, indicators, or trading signals will result in profits or that they will not produce losses. Some profit examples are based on hypothetical or simulated trading. This means the trades are not actual trades and instead are hypothetical trades based on real market prices at the time the recommendation is disseminated. No actual money is invested, nor are any trades executed. Hypothetical or simulated performance is not necessarily indicative of future results. Hypothetical performance results have many inherent limitations, some of which are described below. Also, the hypothetical results do not include the costs of subscriptions, commissions, or other fees. Because the trades underlying these examples have not actually been executed, the results may understate or overstate the impact of certain market factors, such as lack of liquidity. Legacy makes no representations or warranties that any account will or is likely to achieve profits similar to those shown. No representation is being made that you will achieve profits or the same results as any person providing a testimonial. No representation is being made that any person providing a testimonial is likely to continue to experience profitable trading after the date on which the testimonial was provided, and in fact the person providing the testimonial may have subsequently experienced losses. The cost basis for some of the options in a portfolio may be reduced by rolling over profits at option expiration which is one of the Hughes Optioneering Trade Management Rules. Some income figures presented represent the total amount of option premium collected during the referenced period. Actual profits were less. Open trade profit results may have increased or decreased when the trades were closed out. Chuck Hughes' experiences are not typical. Chuck Hughes is an experienced investor and your results will vary depending on risk tolerance, amount of risk capital utilized, size of trading position, willingness to follow the rules and other factors.

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