Are You Watching the Huge Breakouts in Financials XLF FAS FAZ

Financials! We’re seeing financial stocks – seen fastest by the XLF Sector EFT – surge today on a breakout.

Let’s plot the ETF breakout and then compare that quickly with the more aggressive leveraged FAS and FAZ.

As we saw in this morning’s update post, the market surged to new highs again on another big breakout.

I’m highlighting three prior consolidation (rectangle) phases – two large; one small – and the breakouts.

Financials benefit from the expectation of lower taxes and less regulation in the future (governmental policy) and investors are clearly acting eagerly ahead of any actual changes in the current policies.

That’s ultimately how the stock market works – it forecasts the future three to six months ahead.

Right now, the collective wisdom is that the future will be bullish and financials particularly will benefit from the new congress.

Of course, that’s yet to be seen but that doesn’t matter when perception is current reality.

So we have a breakout beyond $ 25.00 as the strong uptrend continues.

If you don’t like trading the relatively less-volatile ETFs, you can crank up the dial with leveraged funds.

Here’s a quick comparison of FAS (3x bullish) and FAZ (3x bearish):

The point here isn’t to call a trade in these markets but rather to compare them to the XLF.

The FAS 3x leveraged (small cap financials) leveraged bullish fund doubled since mid-2016 and continues through the $ 50.00 per share level.

Compare it to its more rambunctious sister the FAZ (3x leveraged short/inverse/bear):

FAZ fell 50% from mid-2017 at the same time FAS doubled while underlying XLF rallied roughly 35%.

Such is the power of leverage.

Just keep in mind these funds are best traded as intraday or VERY short-term swing trades instead of investment or longer-term swing trading vehicles.

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Corey Rosenbloom, CMT

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Corey’s book The Complete Trading Course (Wiley Finance) is now available along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).”


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Charting Risk On and Risk Off with Utilities XLU and Financials XLF

When we’re talking about “Risk-On” or “Risk-Off” Money Flow in the market, there’s many ways to do that.

One simple way is to compare Treasuries and Stocks.

However, if you want to look within the stock market, you can also compare the Utilities group (XLU) with a bullish or Risk-On group like Financials (XLF).

Let’s compare these two groups and see what we can learn right now:

Starting at the beginning of 2016, we see the performance so far of these two ETFs.

At the same time the XLF (green) Financial ETF is down 8% year-to-date, Risk-Off Utiliites (XLU) is up 17%.

Despite the majority bullish or sideways action in the stock market, internal money flow has been defensive or protective.

We also call this “Risk-Off” and we see that when ETFs such as Utilities (XLU), Health Care (XLV), and Consumer Staples (XLV) outperform other sectors.

It looks like the big funds were correct by being defensive through most of 2016 and we can see their footprints by looking at comparisons like these.

Let’s see the actual price charts that gave us clues of a defensive 2016 so far:

Utilities (XLU) – which are often compared to the safe-haven of Treasuries – found a bullish reversal low in August 2015 and price rallied impressively higher from there.

In fact, during periods of weak equity (stock market) price action, the XLU performed very well as money left the riskier stocks and fled to the defense of the protective stocks (including Utilities).

Here’s the same timeframe chart of the XLF Financial Sector:

Instead of finding a bullish reversal low in August, the XLF Financial ETF created a top in July and has been in a persistent downtrend (lower lows and lower highs) since this point.

Carefully compare the sell-swings in the XLF which became strong bullish rallies in the XLU.

Even if you don’t trade these ETFs, you can benefit from this type of “Money Flow” or “Sector Strength/Weakness” analysis by discovering the footprints of the big money and how big funds are positioning their assets within the stock market.

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Corey Rosenbloom, CMT

Afraid to Trade.com

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Corey’s book The Complete Trading Course (Wiley Finance) is now available along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).


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Earnings Season kicks off with Financials in focus!

With Alcoa’s quarterly report last night the spring earnings season officially kicked off. With April monthly expiration Friday, traders will focus on the financial sector this week with JP Morgan Chase (JPM) reporting Wednesday. Coincidentally, the Fed will release its beige book survey of regional economic conditions on Wednesday as well. On Thursday, Bank of America (BAC), PNC Financial Services (PNC) and Wells Fargo report. On Friday, Citigroup (C) and Chuck Schwab (SCHW) in the brokerage space report. With the expected slowing delay in rate increases by the Fed, the financial sector has been a laggard, underperforming the S&P500 this year.

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We will see if the actual company reports paint a better picture than has been assumed by the markets. The forward guidance with the new rate environment will be especially critical to the earnings event movement.

Looking at the JPM option chain, with roughly a 2-dollar straddle (1.91 bid | 1.96 ask) the options give stock traders a look at what type of reaction to expect. With last nights close at 58.20 that premium represents 3.3% of the stock price. You can quickly see the earnings impact to the implied volatility of the April options by opening the Vol Constellation. The implied for the 4 day options spiked up to 41.25%, the weekly April 22nd up to 29.5% when the longer dated options which have less sensitivity to this specific earnings event are in the low 22% vols. This gives us a good estimate of where we expect the post earnings vol crush to go. The trick is we don’t know where the underlying stock price will be trading when that vol crush occurs. You can see that even the way out of the money 61 calls and 55.5 puts have bids and values due to the event uncertainty. Trading in short dated options around earnings has elevated risk as there is not any time after the event for the options to “normalize”. They will quickly change to either be in or out of the money and trade very close to parity.

04122015-blog-chart-1

If you choose to trade expiration events, defining your risk at the onset of the trade is critically important.
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Wednesday, April 13, 2016 4:30 p.m. ET

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Ouch! XLF Financials Break Support to Trigger Breakdown

Stocks in the Financial Sector are triggering potential bearish sell signals today on a breakdown under a key support trendline.

Let’s highlight this trendline breakout, note the bigger picture, and plan accordingly.

All was well through most of 2015 with the XLF Financial Sector SPDR (ETF) as seen with higher bullish volume in June and July along with a stable rising trend through all of 2015.

All of that changed in August when price collapsed and bearish (liquidation) volume surged to new highs… as price erased all the gains of 2015 and more in just three sessions.

A logical retracement catapulted price into the underside of the falling 20 day EMA (Green) which is a target to play for on a retracement swing.

It’s also a spot to short-sell against if you believe additional downside price action is likely.

After a failed breakout beyond this level – it’s roughly $ 23.40 per share – price formed a nasty Bearish Engulfing Candle on the Daily Chart and then broke under the lower rising trendline to trigger (and confirm) a sell signal in the ETF.

Shares of leading companies like Goldman Sachs (GS), and Morgan Stanley (MS) are showing similar patterns.

The implication from the breakdown is that price can once again move to test the spike-reversal lows near $ 22.00 per share in the ETF and comparable price levels in the individual financial companies that comprise the sector ETF.

Here’s a zoomed-in perspective of the pattern and breakdown today:

A Symmetrical Triangle formed for most of September and we saw the bullish breakout propel price into the upside target (prior high) above $ 23.60.

With divergences – and the Fed Day announcement yesterday – price moved down away from this target back toward the lower rising key support pivot ($ 23.20 at the time).

Today’s session sees broader market weakness and a gap breakdown lower for the Financial ETF (XLF).

This doesn’t bode well for the sector and again could suggest a continuation movement toward the prior lows above $ 22.00 per share.

For now, focus on the $ 23.00 level as an “Alternate Thesis Breakout” that – if price pushes back above it – could negate the expectation for a retest of the prior low.

Otherwise, we’ll focus on the possible movement lower “down away from” this short-term pattern.

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Corey Rosenbloom, CMT
Afraid to Trade.com

Follow Corey on Twitter: http://twitter.com/afraidtotrade

Corey’s book The Complete Trading Course (Wiley Finance) is now available along with the newly released Profiting from the Life Cycle of a Stock Trend presentation (also from Wiley).


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