The set-up: The Financial Select Sector SPDR (XLF) got slammed last week with yields going lower. The ETF dropped by about 3 percent, falling below its 200-day simple moving average in the process. I’ve had a lot of success with XLF throughout this year trading off of yield correlations – rather than simply looking for technical entry points – so last week’s fall puts the XLF right back on my watch as a possible bounce-back play.
What I’m looking for: Yields appear to be cooling off a bit pre-market this morning, and that correlation should give the XLF a boost back above the 200-day moving average. XLF has to not only cross back above the line, it has to hold it; if XLF is not above the average at 3:30 p.m. EST, I’ll simply move on.
How I’ll play it: Assuming I see the action I’m expecting, I’ll look to Dec. 15 $44 or $45 call options. The moving average will be my stop-loss, and I will be looking to take profits if I get to a 10 percent gain.
Davis Martin is the head trader at Dailyprofitmachine.com. He trades SPY calls and puts and swing trades individual stocks and stock options. At the time this article was published on RagingBull.com, he had no open orders on XLF, but was looking to trade it under the conditions described in this commentary. He last purchased XLF Dec. 15 $45 calls on Aug. 29, closing the position a day later.