Why I'm Buying Financial Sector ETFs

09/03/2010 12:01 am EST

Focus: ETFS

Financial stocks have been hideous. Banks, brokers, you name it, and it’s been taking it on the chin lately. Shorts are getting cocky.

What’s so interesting though is that, like the market, many of these stocks have a shot at establishing a higher low on their daily charts relative to the July low—if this pullback finds buyers.

I should clarify; I was once told that “if” is a really big word for only two letters. That’s true, but let’s look at the financial sector ETFs starting with XLF.

By the way, the points stated below also apply to FAS and UYG, which we’ll review as well.

As a technician, I realize perfection isn’t to be expected when looking at a chart. Algorithms and savvy traders alike recognize that the head-fake breakout or breakdown can be a fabulous way to establish reversal positions. And this is one such candidate.

With the July 1 low of $13.34 getting broken by a nickel just last week, XLF has stabilized (for now, anyway). I like that for a few reasons:

  1. First, it shook out some traders on that “breakdown” through support
  2. Second, it’s frustrating those who got short on the break, providing no follow through yet
  3. Third, there’s a downtrend line just overhead, which was established throughout August, and if crossed, it would provide another technical reason for buyers to enter (or re-enter) the picture

That leaves three potential trader types as would-be buyers if an advance begins:

  1. Shorts would need to cover
  2. Shaken-out longs would want to re-enter
  3. New longs would want to establish positions

So there is some appeal here on both technical and psychological grounds. Well-defined pivots like this from key zones can produce explosive moves, particularly when multiple groups of traders may be poorly positioned.

The Plan

With XLF churning over 70 million shares on an average day, this thing is not a fast mover.  Plus, it’s range-bound with the $15 zone offering formidable resistance over the past three-plus months.

I’m establishing a long position at current levels with an initial stop in the $13.20 area (half position beneath last week’s low) and a final stop just beneath the $13 level. That would be favorably offset with a potential move back up to the $15 neighborhood, where key resistance resides.

The aforementioned $13 zone offered a multi-month peak back in May 2009, and there’s an unfilled breakaway gap from August 2009, which could get filled on a continued slide from here. So, I view that as an adequate loss-cut area for this trade.

If this thing is able to gather some traction, I’ll then “lighten and tighten” (peel off pieces on the way up and adjust my stop accordingly). I’m expecting to be in it for a few weeks if it works, so I’ll be patient along the way.

Here’s a closer look at the XLF chart for you:

Click to Enlarge

NEXT: Timely Review of Leveraged ETFs UYG, FAS


Not to be forgotten are the leveraged ETFs, which offer more bang for the buck. UYG is the Proshares Financial ETF, which is essentially the 2x levered version of XLF. Using the same rationale, I’m looking for UYG to return to the $58.50 resistance area while using a stop of $46 should support happen to get broken solidly.

Here’s a closer look at the UYG chart for you:

Click to Enlarge

Finally, the title of “most slippery” of the levered financial sector ETFs goes to FAS, which is the Direxion Financial Bull, which is 3x the movement you’d expect to see in XLF. Like the other charts, I’m looking for FAS to return to resistance, which is in the $24 area. Should it happen to break down, a gap fill from August 2009 down to the $16.50 area would be my cue to exit.

Here’s a closer look at the FAS chart for you:

Click to Enlarge

By Jeff White, trader, The Stock Bandit University
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