Ditch the Sexy Crowd for the Zits and Muffin Tops
- Posted by Greg Harmon
- on April 13th, 2011
Traders flock to the high flying momentum areas of the market. They are sexy. Everyone is looking for financials to finally make a move. Energy has been hot. Tech can be a mover. These sexy beasts gather most of the attention like movie star couples. But the ugly boring sectors, the ones with zit strewn faces and muffin tops, are the where the money can be made. Below is a ratio chart of the Consumer Staples Sector SPDR ETF,$XLP, against the Materials Sector SPDR ETF,$XLB.
This ratio has been moving in a channel between 0.786 and 0.745 since mid December and is now approaching the top again. As it rises the Relative Strength Index (RSI) is rising steeply and the Moving Average Convergence Divergence (MACD) indicator has just crossed positive. Also the Bollinger bands are beginning to expand as it reaches the top band. If it can break through the top of the channel then there is resistance at 0.800 and 0.820 before the 38.2% Fibonacci retracement level of 0.824. If it rejects at the channel top then there is support on a retracement at 0.765 and the channel bottom at 0.745. The RSI and MACD support a break higher, with the current trend.
Buy the ratio with a break of the 0.786 level using it as a stop loss with a target of 0.824, a 50% retracement of the downward move. Raise stops as the ratio passes through the resistance levels of 0.80 and 0.820 along the way. To execute this buy 400 shares of XLP for every 500 shares short of XLB. On a full move to 0.824 this nets $771-794 per spread. The interim level at 0.800 would yield a profit of $327 for comparison.
Sell the ratio if it rejects at the channel top again using the top as a stop looking for a target of 0.745. To execute this trade sell short 400 shares of XLP for every 500 shares bought of XLB. On a move to the channel bottom this trade will net $744-800 per spread traded.
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The information in this blog post represents my own opinions and does not contain a recommendation for any particular security or investment. I or my affiliates may hold positions or other interests in securities mentioned in the Blog, please see my Disclaimer page for my full disclaimer.blog comments powered by Disqus
Gregory W. Harmon CMT, CFA, has traded in the Securities markets since 1986. He has held senior positions including Head of Global Trading, Head of Product Development, Head of Strategy and Director of Equity. (More)
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