I thought it would be interesting to once a week review a sector ETF or a common stock that is not the SPY ETF. Other than trying to keep these reviews from being “the same”, I think this is a pretty good idea. Firstly, many readers may not have looked at the stock or sector ETF in a while, so it could actually create some trading ideas. And secondly, I think by using a non-SPY example, I can illustrate the fact that the set-ups and concepts that aid you in trading the SPY are the same ones that will help you trade any stock/ETF you wish.
Before readers go and start trading some exotic stock or ETF, the one word of advice I would give everyone is that you should be familiar with how a stock trades (especially non-large cap stocks) before you really try to trade it with your own capital. By that I mean for example, you should have some idea about how a stock/ETF trades during different time periods … how does it trade in the first ½ hour of the day? Does it make large whippy moves with many fake outs? Does it always pop the first 10-minutes while the market maker pads his pockets? Does it always come in hard during the last ½ hour of the day? All stocks/ETF’s have their own characteristics and I suggest that people primarily trade securities that they have a reasonable history with.
So looking around I thought I would evaluate a sector that just might now be starting to play catch up with the rest of the market … Financials. I posted a weekly GANN chart today on the XLF (read the XLF blog), and highlighted the fact that the ETF was banging today on the high it made in April 2010. In comparison, the SPY busted through its April high first in early November and then for good in early December.
The XLF peaked at $17.12 in April 2010, and today it broke that level, for however briefly as it was, when it hit $17.13.
Even more importantly to me as someone who studies GANN, is the fact that the XLF is pushing above that all important 50% level in the GANN chart drawn from the highs in April 2008 (right before the credit crisis) – see the XLF blog. If the XLF can show that it is going to stay above this 50% mark ($17.025) then it should be able to make it up to the next GANN resistance line of $19.00 for a gain of about 10% from today’s levels.
So let’s look at the financials from the ground zero … what I mean by that is let’s look at it as I would start to look at a sector that I had not looked at in a while. We will go through the whole process (in less than 10 pages LOL) so that you all hopefully will pick-up some good tips.
Let’s do this …
On a macro sense I frequently go through relative charts to see how a sector is doing relative to the overall market. Here is how the XLF is doing …
You can see that the XLF finally broke the down trend line on its relative chart to the SPY in early December 2010. After the initial burst of outperformance in December, the sector has made a nice consolidation since early 2011. By that I mean the sector has held up well, in essence just going sideways while it “regenerates” strength. You can see by my curved arrow I am projecting that this rounded bottom continues higher and the XLF will again start to outperform.
So it looks like the wind will start to be at our backs here soon if we are long the XLF … great!! Lock and load and enjoy the ride. Wait a minute … as Ninja level 9 traders we want to find the best financials to buy directly to juice our returns. How do we do that?
Pretty simple … let’s find the financial stocks that are outperforming the others. I do that using my stockcharts.com account. Knowing that the XLF is just now coming back to its April 2010 highs, I can do a simple search/filter of financial stocks that are trading above their 52-week highs. Believe it or not there are not a lot, out of the 98 stocks in Stockcharts.com list of financials (with a minimum price > $5 and daily volume > 1million), only 9 are above their 52-week highs as of yesterday’s close – less than 10% of the total. That is pretty crappy right … yeah but that tells you how much room the sector has to play catch-up with the market.
The thought process is that when a sector starts to outperform the overall market, look to the leaders for the first portion of that outperformance. When those horses start to lose their strength, look to the laggards in the group to see if there is any hidden gems. Once those are done, you better get on to the next sector … and the process starts all over again.
Looking at the market as a whole, the SPY may not even make a big retracement when/if we ever get a correction. We may just get a big rolling sideways chopping motion in the overall indexes as sectors rotate from underperforming to outperforming and vice-versa. Sector selection might be key to outperforming in 2011. See the list of stocks on the next page …
So when we scan these stocks we look for good candidates to buy … what are we looking for? Well you can be aggressive and buy stocks that are pushing hard right now or you can look for strong stocks (i.e., these stocks that are out performing their sector) and buy them when they make a pullback/retracement move. I picked Suntrust Banks (STI) as my example for this Recap.
You need to look at 15-min or 30-min charts to find good pull-back candidates. On the following page you can see that STI broke its larger 30-min trend line on Wednesday and pulled back. Late yesterday STI broke above the down trend line of that pull-back. That was your first hint that STI might be ready to start going again.
Here is how we get ready to trade a stock … we need to look for support/resistance levels and get a plan in place before the day’s trading starts.
Looking at the 30-min chart above we can see obvious levels that supported the stock and levels that acted as resistance over the past 10 days or so. I will often round some of the levels to a round number if it is close to the exact level. When levels are tested they are seldom tested to the exact penny … it is the area that we should be focused on.
So now we have our resistance/support areas next we gear down to the 5-min chart to get prepared to trade the stock intra-day today. STI doesn’t trade pre-market so we should let the stock open to see what will happen. The stock futures were indicating a down market so we should be looking for an area of support for STI to see if it will hold.
The previous day’s low was right at our resistance line at $31.23 … we needed to see how price would act if it were to get down to that level right near the open.
On strong stocks that have sold off for a couple of days, you will often get a set-up for what is commonly referred to as a “push-through failure”. In essence, when strong stocks retrace/correct for a couple or three days, the selling pressure will almost be ready to come to an end. Often on days where first thing the overall market is under pressure, these “oversold” strong stocks will push through a key level as weak hands sell at “cheap” prices. When sellers dry up, which happens relatively quickly since the stock is strong, price moves back up through the support price. When this happens, smart buyers pounce and bid up the stock, which attracts even more buyers trying to buy an attractive stock at a cheap price. That is what happened today for STI …
Depending on your aggression, your familiarity with STI and your pre-market preparedness, you should have gone long STI when one of the above important areas was broken. The final one for most conservative accounts is that previous afternoon’s swing high. That is an area that most traders recognize as an important signal that the stock wants to go higher.
The following 5-min chart captures the whole day’s action … you should all be able to start identifying the spots to buy and sell STI today. It’s the same things that we go over with the SPY everyday … watch how price does when it gets to a resistance area … for strong stocks when they make new momentum highs, you have to be ready to buy the pull-back. That happened at 12:20pm when price put in a spinning top candle at an obvious area of support $132.20. Then we made a marginal new high, on weakening internals, sold back below the resistance line, and then finally broke a trend line we drew as support. I hope it is starting to click for you guys/gals.
Higher Time Frames
SPY – Daily Chart
We are running on fumes or should I say POMO $ … the market keeps surprising everyone and it looks like it will need a climatic push/exhaustion candle to stop this train. Enjoy your weekend everyone. Please send me feedback to tell me if you found this Friday report a nice change and whether I should keep doing it once a week.
