Watch Support for the Consumer
Many market spectators get it wrong when they think about what we do as technical analysts. They think it's about making a call and being right more often than not. Well, it's more complex than that. Sometimes we make names for ourselves by making some good calls, and then we're only as good as out last call.
You have to think of it this way, though: What is more important? Is it being right, or making money? Personally, I'm in the business of helping subscribers make money by studying past patterns and working on providing an edge with market entries. I'm certainly not always right, and I always make a point of defining my risk for when I'm "wrong" the trade.
So, part of the good news is that when I'm wrong, my risk is clearly defined. Also, when I'm wrong, you typically lose quite a bit less than what you make when one of the setups plays out as expected. Also, with the use of trade triggers, those will filter out many of the setups that are not going to work out anyway.
When you talk about risk/reward, I like to have it where you might risk 1 unit of cash to make 4. There are times, however, when you only risk 1 unit, and a trade might even pay you 20 or even more. It is literally possible to have only 50% of your trades work out, but if you cut your losses quickly and let your winners ride, you can still extract a fair amount of cash from the markets.
So, in the case of the Consumer Discretionary SPDR ETF (XLY) , I see an area of support that is potentially important. Now, I have no idea if this zone will hold. What I do know, however, is that when a support zone does hold and I see a buy trigger against that zone, it is worth placing an educated bet against that zone.
Now, if Monday morning the market gets hit hard and we blow through this support, my trade setup zone is a bust. In that case, I don't do anything with it and I just move on to the next setup. If, however, we do hold above the $86.15-53 area, I will start watching a lower timeframe chart for a buy trigger.
What timeframe chart you should use for a trigger really depends on the timeframe you are trading. If you are day trading, you can use something like a three-minute or a five-minute or even a tick chart for a trigger. If you are swing trading, however, the typical trigger I like to watch is on a 30-minute chart.
What I want to see in the case of XLY is the eight-day exponential moving average (EMA) to cross above the 34 EMA on the 30-minute chart. It also needs to take out a prior swing high indicating a pattern shift. Let's take a look at that chart next:
Consumer Discretionary SPDR ETF XLY -- Daily Chart
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Via the 30-minute chart, at this point I would need to see a rally above the $86.94 swing high along with the blue moving average line to rise over the red moving average line.
(8/34 EMA crossover).
Consumer Discretionary SPDR ETF XLY -- 30-Minute Chart
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If I don't see this, I won't be entering the market on the buy side. If I do see such a trigger, I will enter the market and then define my risk either below the most recent low or below the low end of the price cluster zone.
At the time of publication, Carolyn Boroden had no positions in the stocks mentioned.