3/21/2012 XLF #5

SPDR Financial Selected Sector Fund (XLF)

The financials have been leading the market lately. Bank of America, Citigroup, JP Morgan and Wells Fargo…etc. have been making new highs every week (I think this is insane). Like the SPY update I just did, I'm going to re-establish my plan and trade what I see.    

The XLF broke out of the consolidation range @ $14.4 - $14.98 from the last post. If you look at the weekly chart, the move started at the beginning of the year, consolidated for 5 weeks and then broke to the upside on JP Morgan’s positive news last week, which is an exact 1-2-3 measured move. Generally for measured move, you will expect the exit move having the same length as it enters the consolidation range. The 1^st leg was a $ 1.75 run so I'm looking at the move finishes somewhere around $ 16.15 ($ 14.4 + $1.75). However, here is a problem, I see a resistance level @ $15.8. When you look to the left, the XLF topped and bottomed at the $15.8 level several times in a 3 years’ time frame and you will see more when you look at the chart in 5 years’ time frame. If the XLF closes above the $15.8 level with the following bar opens above it, the resistance level will become a support. Once the XLF breaks the resistance, it is free to run up to the major resistance @ $16.76 from the technical stand point. Personally, I doubt if the XLF can make another $1 dollar move up in the next couple weeks especially tax season is underway.

If you go to the daily chart, you can see better how the XLF reversed on the support/resistance level @ $15.8 in the last 3 years. Up ahead, there is also an interim resistance @ $16.23, which locates only $.08 cents away from the measured move target @ $16.15. If the current move continues to push, I expect some sort of consolidation to happen around the resistance level @ $16.23. Furthermore, I see the XLF is currently trading in an up sloping channel but I think the channel is too steep that the uptrend can’t be sustainable for too long, I'm expecting a pullback to happen by next week. A pullback that breaks the channel should find support at the previous consolidation top @ $14.98. But right now, I will continue to trade with this channel until it is a confirmed breakout. Even the XLF is trending up, I don’t recommend to take a long position at current price @ $15.81 since the 3^rd leg measured move is almost over; you don’t want to get stuck in an envy buy area. It is better to wait for some sort of retracement before you go long in this. A side note to this is, as the XLF moving higher volume declines, fewer buyers are willing to buy while more sellers are stepping in, bringing in more volatility to the game. If the XLF quickly rises above the resistance @ $16.23 in the next few bars, I don’t think it’s a bad idea to short the stock with a small stop loss for a quick little pullback.

Another thing I want you to see in the daily chart is the diamond bottom I drew a few posts back. You can see the move started in early August 2011 around $14.98 and when the XLF exits the pattern, it rose to the pattern’s target @ $14.98, the same place where it started. Remember that whenever you see a quick rise or drop that leads into the diamond top or bottom respectively, you want to set your target at the same level where the rise or drop starts, 70% of the time your target will reach when the breakout is triggered.

In the hourly chart, the SPY was stair stepping up until it started to form a bull pennant in the last 2 trading days. As the price bars coming to the edge of the pennant, I'm expecting a breakout or breakdown will happen tomorrow; and since this is a bullish pattern with declining volume, the XLF will most likely break to the upside. Nevertheless, the breakout can’t be confirmed until price actually goes above the temporary resistance @ $15.97; the target for the breakout trade locates at the resistance level @ $16.23. For the downside risk, I think the XLF has pretty decent support sitting underneath its’ current price. With the 50 SMA rising to the 3^rd consolidation range @ $15.63 - $15.75, the bottom of the 3^rd range @ $15.63 will be the risk for the breakout trade. Furthermore, there are 2 levels of pivot support sitting at $15.66 and $15.73, these should provide further downside support for the rest of the week. And if pullback does happen, the 2^nd consolidation range @ $15.32 - $15.45 will provide another level of support before it heads toward the 1^st consolidation top @ $14.94. However, I don’t recommend you to hold a long position from one range to another, once the price drops through the bottoms of either the 3^rd or 2^nd range, you should be out of the long trade already because I don’t see any underlying supports in between the consolidation ranges.    

  

I hope this post offers you some insight, thank you for reading and please feel free to give me some feedback.