Breaking Down XLF’s Technical ‘Buy’

Dear Reader,

Yesterday, we looked at a Daily Price Chart for the SPDR S&P Retail ETF, noting that XRT has been making a series of new 52-Week Highs.

For today’s Trade of the Day e-letter we will be looking at a daily price chart for the Financial Select Sector SPDR ETF, symbol: XLF.

Before breaking down XLF’s daily chart let’s first review the investment objective of the ETF.

The Financial Select Sector SPDR Fund seeks to provide investment results that, before expenses, correspond generally to the price and yield performance of the Financial Select Sector Index.

Now, let’s begin to break down the Daily Price chart for the XLF ETF.

Below is a Daily Price chart with the 50-Day EMA and 100-Day EMA for XLF.

50-Day EMA and 100-Day EMA ‘Buy’ Signal

The 50-Day Exponential Moving Average (EMA) and 100-Day EMA are moving average indicator lines that can provide buy and sell signals when used together. When the shorter-term 50-Day EMA crosses above or below the longer-term 100-Day EMA, this provides either a buy or sell signal depending on which direction the ETF price is moving.

50-Day EMA line Above 100-Day EMA = Price Uptrend = Buy signal
50 Day EMA line Below 100-Day EMA = Price Downtrend = Sell signal

When the 50-Day EMA (blue line) crosses above the 100-Day EMA (red line) this indicates that the ETF’s buying pressure has begun to outweigh the selling pressure signaling a ‘buy’ signal. When the 50-Day EMA crosses below the 100-Day EMA this indicates that the selling pressure has begun to outweigh the buying pressure signaling a ‘sell’ signal.

Buy the XLF ETF

As the chart shows, on November 17^th, the XLF 50-Day EMA, crossed above the 100-Day EMA.

This crossover indicated the buying pressure for XLF exceeded the selling pressure. For this kind of crossover to occur, an XLF has to be in a strong bullish trend.

Now, as you can see, the 50-Day EMA is still above the 100-Day EMA meaning the ‘buy’ signal is still in play.

As long as the 50-Day EMA remains above the 100-Day EMA, the ETF is more likely to keep trading at new highs and should be purchased.

Our initial price target for the XLF ETF is 42.50 per share.

109.5% Profit Potential for XLF Option

Now, since XLF’s 50-Day EMA is trading above the 100-Day EMA this means the ETF’s bullish rally will likely continue. Let’s use the Hughes Optioneering calculator to look at the potential returns for an XLF call option purchase.

The Call Option Calculator will calculate the profit/loss potential for a call option trade based on the price change of the underlying stock/ETF at option expiration in this example from a flat XLF price to a 12.5% increase.

The Optioneering Team uses the 1% Rule to select an option strike price with a higher percentage of winning trades. In the following XLF option example, we used the 1% Rule to select the XLF option strike price but out of fairness to our paid option service subscribers we don’t list the strike price used in the profit/loss calculation.

Trade with Higher Accuracy

When you use the 1% Rule to select an XLF in-the-money option strike price, the XLF ETF only has to increase 1% for the option to breakeven and start profiting! Remember, if you purchase an at-the-money or out-of-the-money call option and the underlying ETF closes flat at option expiration it will result in a 100% loss for your option trade! In this example, if XLF is flat at 40.36 at option expiration, it will only result in a 4.8% loss for the XLF option compared to a 100% loss for an at-the-money or out-of-the-money call option.

Using the 1% Rule to select an option strike price can result in a higher percentage of winning trades compared to at-the-money or out-of-the-money call options. This higher accuracy can give you the discipline needed to become a successful option trader and can help avoid 100% losses when trading options.

The goal of this example is to demonstrate the powerful profit potential available from trading options compared to ETFs.

The prices and returns represented below were calculated based on the current ETF and option pricing for XLF on 2/28/2024 before commissions.

When you purchase a call option, there is no limit on the profit potential of the call if the underlying ETF continues to move up in price.

For this specific call option, the calculator analysis below reveals if XLF increases 5.0% at option expiration to 42.38 (circled), the call option would make 52.4% before commission.

If XLF increases 10.0% at option expiration to 44.40 (circled), the call option would make 109.5% before commission and outperform the ETF return nearly 11 to 1*.

The leverage provided by call options allows you to maximize potential returns on bullish ETFS.

The Hughes Optioneering Team is here to help you identify profit opportunities just like this one.

Interested in accessing the Optioneering Calculators? Join one of Chuck’s Trading Services for unlimited access! The Optioneering Team has option calculators for six different option strategies that allow you to calculate the profit potential for an option trade before you take the trade.

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Wishing You the Best in Investing Success,