Sunday, March 29, 2009

Financials VERY Bearish; March 29, 2009

Above is an hourly chart of the financials' ETF (XLF). The financials have been leading this market up and down for the past several months so it's good to keep an eye on it. As you can see, the ETF has risen from $5.88 to $9.71 in just 12 days which is an amazing 65% rally! This is obviously way too much too fast and after that 12 day strong 65% rally, the financials have not made a new high since the peak on March 18th, even though the stock market has made new highs. This divergence supports my position that the stock market is headed lower in the short term, and should hold true as long as the XLF does not make a new high above $9.71 first.

You can see in the chart above that the XLF's rally was basically a straight line up, but then in haulted at the $9.71 area and moved sideways, consolidating in a triangle-looking formation. According EWP, a triangle in this instance would mean it's in a 4th wave and the consolidation is just a pause in the uptrend before it thrusts higher to complete the move. Because of this, I can't rule out one more sharp rally to new highs before it reverses sharply. However, looking at the stock market and how bearish this sector looks right now, I'm far from certain this will happen. So again, I'm using put options on the XLF so I can risk whatever I want and I can just sit back and let the trade run without worrying about losing all my money if I had a straight short equity position. Using put options will allow for a sharp rally and reversal without getting stopped out and trying to get back in. Regardless, this sector looks very bearish and should fall hard, soon.

Bottom line: I'm short the XLF using naked April put options expecting a sharp decline to at least the $7.90 area, which is a 25% decline!

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