XLF – 6 September 2013 Close

simple trading

‘Bella from NY asked if XLF was forming a good buy setup.

XLF is an exchange traded fund which “seeks investment results that, before expenses, correspond to the price and yield performance of publicly traded equity securities of companies in The Financial Select Sector Index. In seeking to track the performance of the index, the fund employs a replication strategy. It generally invests substantially all, but at least 95%, of its total assets in the securities comprising the index. The index includes companies from the following industries: diversified financial services; insurance; commercial banks; capital markets; REITs; consumer finance; thrifts & mortgage finance; and real estate management & development.”

— Yahoo Finance Profile

XLF has had a strong run off its 2011 crisis low nearly doubling in the process (though we are well off the all time high of $38.15).  As chartists, we are wary about “joining a trend” anytime a security (especially one representing mature businesses) has already had an extended run in one direction.

Still, if one is looking to buy XLF, there are several approaches:

– Random Entry — the preferred approach by the masses

– Continuation Pattern — You could simply buy with a tight stop at the most recent swing low (numbered 1-5).

– Previous Support — A purchase could be made at any of the previous swing lows as support.

– TAOST Magnet Setup — A more conservative approach entails waiting for a price pullback to the 50% Fibonacci Retracement Level (identified by the ellipse on the chart above).

These are just a few of the tactics you might use to get into XLF if you feel like the prospects of US financials are positive and, more important, not yet reflected in current prices.  Just remember, whatever approach you use, be sure to decide where to limit your losses and then stick to that plan.

By the way, just in case this doesn’t really answer your question… XLF is technically in a buy setup.  If we assume that 1 is a higher low which follows a higher high, we can infer that XLF remains in an uptrend.  By using a violation of that most recent swing low at 1 as a stop, we allow the chart to tell us when the up trend is broken.

Many thanks for your question.