SPDR Financial Selected Sector Fund (XLF)
XLF is a financial ETF composed of 81 financial stocks and represents about 14.14% of the S&P 500. The following link has the breakdown of the components and percentage weighted on each component.
I have been trading financial stocks since the first day and this is one of the “must have” charts I keep an eye on all day long. For those who trade the financials, I strongly recommend you to have this chart up while you trade.
Same as the SPY chart, I will include the weekly in this post but I will focus more in the daily and hourly.
In the weekly chart, the XLF has a solid boundary between $10.95 and $17.2. Before the drop in early August 2011, it was trading in an even tighter range from $13.31 to $17.2 for 2 years (August 2009 – August 2011). I highlight these 3 levels in red @ $10.96, $13.31 and $17.2 as the main levels. I also have a support level @ $11.71 because it resembles the bottom of a double bottom pattern (the “W” pattern) if you ignore the 2 tails that broke through the level around October 2011. In near term, I'm expecting price to retest the 6 months top @ $14.17 and consolidate there for a very short period (mostly likely happens in the daily chart) because it is the closest peak since the big drop. If there isn’t any significant bad news that will foreshadow the optimism, it should not be a problem to continue on the upside.
As much as I want to call the diamond area a double bottom pattern, the 2 tails that broke the support level violates the rule. Nevertheless, an incomplete double bottom and a completed diamond bottom are good enough to make me believe the trend is on the upside. To trade the reversal diamond pattern, unlike the continuation diamond I mentioned in the last post, the way that price exit usually mirrors the way it enter and, if you remember, another characteristic of the diamond is the equivalent magnitude on the exit and entry side. Therefore, I'm looking at the price to hit the $15 mark and this should happen in the next bar or the bar after.
In the daily chart, I keep all the drawings from the weekly and add a downtrend line to show that price recently broke and stayed above it, making the up break more legit. If you take a position at current price @ $14.05, the main support/resistance @ $13.31 should be your risk level. If price drops below the $13.31 level and the next bar opens underneath it, that means the pattern is a failure and you should get out of your long position. For target, I set an immediate target @ $14.62 for those who wish to cash out your profit safely. However, I don’t think this is a good trade because it has a less than 1-to-1 reward & risk ratio ($.57 gain vs $.74 risk), which is not a good deal from an economic standpoint. Rather, I suggest using a trailing stop method for profit taking. As I said in the previous paragraph, I'm expecting the price to hit $15. After that, price will most likely consolidate between $15.68 and $14.62. In order to get the most out of the trade, once price goes through $14.62 and opens up another bar above that level, I suggest you to move your stop, or risk level, up to $14.62 to secure the profit. Afterward, for every subsequent peak it makes, you should keep moving the stop up to the bottom of the prior valley (I will show you how to do this in the hourly chart). In this way, you can secure a minimum gain of $.57 per share if price drops back and still have the potential to gain more when price reaches the next resistance @ $15.68 or the range top @ $17.2.
In the hourly chart, I draw an up sloping channel for a better picture of intra-day movement. As you can see, the XLF has been stair stepping up nicely within the boundaries making higher “Highs” (the peaks) and higher “Lows” (the valleys) on the way up. To trade this channel, it is the best to use the trailing stop method. Here is the general idea:
Assume I was quite confident about the uptrend. I wanted to maximize gain without setting a target and, of course, minimize my loss as well. I got in a long position @ $12.6 when the trend started with an initial stop @$ 12.21. At the beginning, I had a $.39 risk. When it made the 1st peak, I moved my stop to the 1st valley bottom @ $12.6. Now that I moved up my risk level to the same price I got in, my risk essentially became $0. After the 1st peak, price retreated but it never hit my stop before it resumed to its up move and formed the 2nd peak. Just like before, I moved my stop to the 2nd valley bottom @ $12.91 and I secured a $.31 gain even if the pattern failed. As price stepped higher making the 3rd, 4th and 5th peaks, I kept moving my trailing stop up to the subsequent valleys. And finally, when price made the 5th peak and fell back, I got stopped out when the tail of the green bar broke through the bottom of the 5th valley @ $13.6. In this way, I cashed out a profit of $1 per share without breaking a sweat.
I hope I gave you some insight in this post, thank you for reading and please feel free to give me some feedback.
P.S You can always double click the chart to bring up a larger image.
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