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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. And, I’ve been featured in the book Market Wizards, alongside investors like Paul Tudor Jones. 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… |
We’ve been following the financial services sector closely these past few months…
It represents some of the heaviest hitters in the market – like Berkshire Hathaway, JPMorgan Chase, and Goldman Sachs.
And those titans typically provide plenty of interesting trading opportunities… Not just when the sector rallies strongly, but when it trades in a range too… Just as it has until recently.
Let’s take a look at the chart…
Financial Select Sector SPDR Fund (XLF)
Source: eSignal
Remember: the red line represents the overall trend, with the upper and lower blue lines defining the trading channel.
Having been in that trading channel since May, this breakout higher was a significant move… XLF went on to make its all-time high just over a week later, hitting $40.86 on October 26.
However, as I noted at the time, XLF was about to face two key tests…
The first was its price action around the upper blue line…
For that resistance line to become a support line, XLF first had to hold above that level. As you can see, XLF has touched the line multiple times and is currently holding…
Financial Select Sector SPDR Fund (XLF)
Source: eSignal
The second test is related to the Relative Strength Index (RSI) at the bottom half of the chart.
XLF’s retreat from its all-time high coincided with a decline in the RSI, with it just touching the upper grey line (overbought level) and then dropping towards the green support line at 50% on the RSI.
This green line is very important… That’s because it helps interpret a stock’s momentum when it’s in between its two major signals (overbought at 70% or oversold at 30%).
In the past, when the RSI formed a “V” on (or near) the lower grey horizontal line and traded up to the green line (resistance), the rally in XLF’s share price fizzled out.
Similarly, when the RSI has formed an inverse “V” and traded down to the green line (in this case, the support), the selling momentum in XLF’s shares also ran out of steam.
So, right now I’m waiting to see what the RSI does next as it approaches the green line.
If the RSI falls through the green support line without stopping, then the recent breakout above the trading channel could be a false bullish signal.
However, if the RSI forms a “V” on (or near) its support, and the XLF share price can hold above the upper blue line, then that means XLF could be forming a base. From there, its next move would likely be higher.
Each time XLF tests that upper blue line (support) and holds it, that support line becomes stronger. This pattern would set us up to capture a future rally by taking a long position in XLF.
Another tell-tale sign that will help confirm the move up will be further divergence in the moving averages (MAs). The short-term 10-day MA (red line) will need to keep moving further above the long-term 50-day MA (blue line).
While XLF’s uptrend is in the balance, the current chart pattern looks very promising.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
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