Thursday, April 9, 2009

XLF Breakout - Extraordinarily Bullish

The breakout in the XLF today was huge because it significantly raises the odds that we are in wave iii of 3 in this rally. Third waves can be any length except they can't be the shortest of waves 1, 3 and 5. Typically, wave 3 is 1.618 or 2.618 times wave 1, which gives 14.45 and 18.27 as targets for the end of wave 3. The top of the previous 4th wave of lesser degree is 13.82. The January high is 12.82. There is Fib resistance around 12.90 and 15.10. The 200dema is around 14, and the 400dema is around 19. All in all, it would seem that 13.82 to 14.45 is highly probable, and 18 may be seen as well.

The strength of this breakout is evident by the fact that the entire body of today's price bar is above the March high, and it closed near the top of the range on higher volume. It is possible that we could see a continuation gap on Monday if this is a 3rd of a 3rd wave.

There still may be a chance to enter the UYG around 3.25 to 3.35 on Monday, but risk is significantly greater now than in mid-March so smaller position sizes should be considered. I was fortunate enough to be able to add to my UYG position near the open this morning at 3.15. I suggested in prior posts that traders be ready to buy the pullback or the breakout. We got the breakout, so there was no reason to hesitate. The above XLF targets would suggest the UYG could move up to 6.00 to 8.50 by the end of wave 3.

Overall, it seems to me that up until now that most people do not believe in this rally. Next week should tell us a great deal. If this rally is for real, as I believe it is, then this rally should accelerate next week as the naysayers are forced to chase it higher.

The name of the game from this point forward will be high quality breakouts, but of the recovering beaten down large caps. I am staying away from the IBD names for the most part as it seems that most of the breakouts of IBD 100 stocks get sold. One exception would be ORCL, which seems set for a nice move after completing a 5 wave rally. A Nasdaq 100 stock that looks interesting is FWLT, which has setup nicely atop the 50dema.

Be patient and only take the best setups, and don't add too many positions in a given week.

1 comment:

david said...

Nice analysis the past few weeks...thanks!