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Larry’s note: Welcome to Trading with Larry Benedict, the brand new free daily eletter, designed and written to help you make sense of today’s markets. I’m glad you can join us. My name is Larry Benedict. I’ve been trading the markets for over 30 years. I got my start in 1984, working in the Chicago Board Options Exchange. From there, I moved on to manage my own $800 million hedge fund, where I had 20 profitable years in a row. But these days, rather than just trading for billionaires, I spend a large part of my time helping regular investors make money from the markets. My goal with these essays is to give you insight on the most interesting areas of the market for traders right now. Let’s get right into it… |
With a 70% gain over this past year, the Financial Services Sector has me excited…
And fortunately, this rally might only just be getting started.
See, back when the broader market rally kicked off last year, it left the Financial Services Sector in its wake.
Back then, the sector traded sideways for months until it finally decided to play catch up. But when it started moving, it shot up like a slingshot…
So, going forward, can this pattern repeat?
Well, let’s take a look at the Financial Select Sector SPDR Fund (XLF).
When we last checked out XLF in October (red arrow), it had been trading sideways since May, and was pushing against the upper band of the trading channel (the upper and lower dark blue lines).
However, not only did XLF break through this upper band, it kept on rallying. And, last week XLF hit its all-time high…
Just take a look at the chart…
Financial Select Sector SPDR Fund (XLF)
Source: e-Signal
Right now, I’m waiting to see if XLF can hold above the upper dark blue line. As I’ve noted before, often a resistance line can change into support if the stock breaks through it.
The other thing I’m watching are the moving averages (MA)…
On the left side of the chart – when XLF was in an uptrend – the short-term 10-day MA (red line) stayed above the long-term 50-day MA (blue line).
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Then, as that uptrend transitioned into a sideways market, the two MAs intersected. They tracked each other closely, criss-crossing several times.
Over the past couple of weeks, however, you can see that the two MAs are starting to diverge. In other words, the 10-day MA is starting to rise further away from the 50-day MA…
That can be a promising sign of an emerging uptrend.
However, the other thing I’m watching is the Relative Strength Index (RSI) at the bottom of the chart…
When I look at the RSI, I typically focus on how the blue line moves in relation to the two grey horizontal lines. The upper grey line is an overbought signal… the lower line is an oversold signal.
Today, though, I want to share with you another way to use this handy tool…
When the blue line on the RSI is swinging in between the two grey lines, it can be hard to interpret.
That’s why I’ve added a red line at the 50% level – right in the middle.
It acts as both a support and resistance line for the RSI and can be really handy to help place your trades.
Let’s go back to the chart to see what I mean…
Financial Select Sector SPDR Fund (XLF)
Source: e-Signal
In June and July – when the RSI’s momentum swung higher after a big drop – XLF’s share price also rallied.
However, each time the RSI subsequently hit the red line (in this case, the resistance) and paused, so did the share price. Meaning, the rally in the share price fizzled as soon as the RSI hit its resistance (red line).
Well, you can also apply it the other way…
When the RSI fell in August and September (blue line went down) and hit the red line (in this case, the support), that coincided with the share price bottoming out.
In fact, when the RSI formed a ‘V’ off the red line on October 13, that became the starting point for XLF’s current rally.
And that’s why the red line is important to what happens next…
As you can see, after its recent breakthrough rally, XLF has been drifting lower over these past couple of days…
If this drift continues, XLF will soon test support (upper dark blue line) on the price chart… and, the RSI could also soon test support (red line).
If both were to hit their support levels and bounce, that would be even more evidence that a new uptrend in XLF is emerging.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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