Chart of the Week: Utilities, REITs and Polarity

You may find these charts boring, but what better opportunity is there to illustrate the Principle of Polarity than with Utilities ($XLU) and REITs ($IYR) recently retesting former resistance turned support at prior highs. Within the context of Technical Analysis, polarity is founded in the fundamentals of supply and demand and is applicable across all liquid assets and timeframes. In its most basic form it refers to the fact that former resistance turns into support and vice versa.

Former resistance turning into support should look something like this...

Here is a quote explaining polarity from the age-old text by Edwards and Magee, Technical Analysis of Stock Trends (8th Edition):

"Critical price levels constantly switch their roles from Support to Resistance and from Resistance to Support. A former Top, once it has been surpassed, becomes a bottom zone in a subsequent downtrend; and an old Bottom, once it has been penetrated, becomes a Top zone in a later advancing phase."

In the case of both $XLU and $IYR a "former top" was surpassed earlier in the year and has acted as a "bottom zone" or support level ever since as demand has overwhelmed supply whenever price has revisited these former highs. This price action is very constructive; we remain bullish on these sectors as long as we're above support and would be using these prior highs to define risk.

I wanted to show the $IYR chart as well as it is a good example of how these support and resistance levels truly are "zones" and rarely are the price reactions as precise as they have been in $XLU where the price highs and lows all occurred in a very tight range between about $57 and $57.20. $IYR has been facing resistance in a much wider range, from the $83 to $85.70 level since price peaked there back in 2016.

Also worth noting is that support and resistance does not have to form at all-time highs as was the case with $XLU but not $IYR, which is still about 9% below its all-time highs from 2007. It just needs to be a significant high or low which represents a level of price memory or interest among market participants.